Shaping the transformation together.

Transcription

1 Shaping the transformation together. ANNUAL REPORT 2017

2 Key Figures VOLKSWAGEN GROUP % Volume Data 1 in thousands Deliveries to customers (units) 10,741 10, Vehicle sales (units) 10,777 10, Production (units) 10,875 10, Employees at Dec Financial Data (IFRSs), million Sales revenue 230, , Operating result before special items 17,041 14, as a percentage of sales revenue Special items 3,222 7, Operating result 13,818 7, Operating return on sales (%) Earnings before tax 13,913 7, Return on sales before tax (%) Earnings after tax 11,638 5,379 x Automotive Division 2 Total research and development costs 13,135 13, R&D ratio (%) Cash flows from operating activities 11,686 20, Cash flows from investing activities attributable to operating activities 3 17,636 15, of which: capex 12,631 12, capex/sales revenue (%) Net cash flow 5,950 4,330 x Net liquidity at Dec ,378 27, Return on investment (ROI) in % Financial Services Division Return on equity before tax 4 (%) VOLKSWAGEN AG % Volume Data in thousands Employees at Dec Financial Data (HGB), million Sales 76,729 75, Net income for the fiscal year 4,353 2, Dividends ( ) per ordinary share per preferred share Volume data including the unconsolidated Chinese joint ventures. These companies are accounted for using the equity method deliveries updated to reflect subsequent statistical trends. 2 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 3 Excluding acquisition and disposal of equity investments: 17,512 ( 18,224) million. 4 Earnings before tax as a percentage of average equity. This version of the annual report is a translation of the German original. The German takes precedence. All figures shown in the report are rounded, so minor discrepancies may arise from addition of these amounts. The figures from the previous fiscal year are shown in parentheses directly after the figures for the current reporting period.

3 Moving Globally VOLKSWAGEN GROUP deliveries in thousand units Moving Globally Key Figures EUROPE/OTHER MARKETS ,505 4,618 4, % NORTH AMERICA % ASIA-PACIFIC SOUTH AMERICA ,935 4,319 4, % %

4 We are making the Volkswagen Group more open and efficient, more innovative and customer-centric. The figures show that we are on the right track.

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6 2 Contents 1 2 TO OUR SHAREHOLDERS 07 Letter to our Shareholders 10 The Board of Management of Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board DIVISIONS 21 Brands and Business Fields 24 Volkswagen Passenger Cars 26 Audi 28 ŠKODA 30 SEAT 32 Bentley 34 Porsche 36 Volkswagen Commercial Vehicles 38 Volkswagen Truck & Bus 40 Scania 42 MAN 44 Volkswagen Group China 46 Volkswagen Financial Services

7 Contents GROUP MANAGEMENT REPORT 51 Goals and Strategies 54 Internal Management System and Key Performance Indicators 56 Structure and Business Activities 59 Corporate Governance Report 67 Remuneration Report 84 Executive Bodies 88 Disclosures Required Under Takeover Law 91 Diesel Issue 95 Business Development 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 130 Volkswagen AG (condensed, in accordance with the German Commercial Code) 134 Sustainable Value Enhancement 157 Report on Expected Developments 164 Report on Risks and Opportunities 190 Prospects for 2018 CONSOLIDATED FINANCIAL STATEMENTS 195 Income Statement 196 Statement of Comprehensive Income 198 Balance Sheet 200 Statement of Changes in Equity 202 Cash Flow Statement 203 Notes 315 Responsibility Statement 316 Auditor s Report ADDITIONAL INFORMATION 326 Five-Year Review 327 Financial Key Performance Indicators 328 Glossary 330 Index 332 Scheduled Dates This annual report was published on the occasion of the Annual Media Conference on March 13, 2018.

8 A completely new ball game has begun. With new trends, new technologies, new alliances. At Volkswagen, we are harnessing the radical changes in our industry to make a new beginning. MATTHIAS MÜLLER

9 1 To our Shareholders

10 TO OUR SHAREHOLDERS 07 Letter to our Shareholders 10 The Board of Management of Volkswagen Aktiengesellschaft 12 Report of the Supervisory Board

11 To our Shareholders Letter to our Shareholders 7 Letter to our Shareholders What do you think makes a good company? First of all, a good company certainly delivers compelling business results. And definitely implements the necessary measures to remain successful tomorrow and far into the future. But I imagine that you, just like me, also believe there is more to a good company than this namely the essence of the organization: what drives it and keeps it together. So ultimately it s about attitude and values. Results, future, attitude: where does your Company stand, where does the Volkswagen Group stand now, in these three dimensions? As far as business figures are concerned, the answer could hardly be clearer: 2017 was an exceedingly successful year for us. Around the world, 10.7 million customers more than ever before chose a vehicle from one of our brands. We are grateful for the trust that this embodies. Our financial figures were also very convincing: sales revenue rose to billion. At 13.8 billion, our operating profit was better than ever despite negative special items of 3.2 billion. And at 7.4 percent, the operating return on sales before special items also exceeded the original forecast. The key performance indicators show that our operating business is strong and the Group s financial situation is solid. The fact that we are in such a good position today after everything that has happened in recent years is the result of really great teamwork. And I would like to thank our employees all over the world for that. It goes without saying that you as shareholders will participate in your Company s success. The Board of Management and Supervisory Board will therefore propose a dividend of 3.90 per ordinary share and 3.96 per preferred share for fiscal year This corresponds to a payout ratio of 17.3 percent. Looking ahead, we like the entire industry are facing major challenges and radical change. But here, too, there is reason to be optimistic. This is also reflected in our share price, which returned to the pre-crisis level at the end of We believe this also expresses the confidence shown by financial markets in our realignment. And, indeed, TOGETHER Strategy 2025, our plan for the future, is taking effect and becoming increasingly tangible. With Roadmap E as a key element of this strategy, we are demonstrating how we intend to help e-mobility achieve its breakthrough not just in our Company, but throughout the entire industry. At the same time, on the road to emission-free mobility, we are pressing ahead with the full range of drivetrains including efficient, ultra-modern combustion engines. Through out the Group, we have begun working hard on the other major future trends as well. On artificial intelligence, new mobility services, digital connectivity and, last but not least, on fully automated vehicles like our Sedric: the first car from the Group to come without a steering wheel or pedals. By the end of 2022, we plan to invest over 34 billion from our own resources in the key technologies of tomorrow.

12 8 Letter to our Shareholders To our Shareholders Each setback should above all encourage us to devote all our energy to bringing about the transformation at Volkswagen. MATTHIAS MÜLLER

13 To our Shareholders Letter to our Shareholders 9 This, too, shows that Volkswagen is changing course. We are steering towards the future. We are not stopping halfway, we are picking up the pace. With a clear goal in front of us: to transform the Volkswagen Group from an automaker into a company that brings sustainable mobility to people all over the world. I firmly believe that we can do this. Because we are following a clear plan for the future. Because we have very successful operations. And because within the Group we have the critical mass, innovative capacity and financial discipline to spearhead this change. You might be asking yourself: That s all well and good, but what about the third criterion you mentioned at the beginning, the attitude in the company, our values? I have to admit: it is here that we are still furthest from our goal. Changing the culture of a large organization is hard. It requires time, endurance and determination. In spite of all the progress I see every day and which I find heartening we still repeatedly encounter setbacks. They hurt, but they are inevitable. What s important is how we deal with them. What we learn from them. Each setback should above all encourage us to devote all our energy to bringing about the transformation at Volkswagen. It s about more open cooperation between our brands. About more speed, pragmatism and decisiveness. A critical ability and the reduction of power distances. And last but not least, we need authentic, vibrant leadership based on values and integrity. So if you were to ask me today: Is Volkswagen a good company?, then my answer would be: Yes, Volkswagen is an exceedingly successful global company. Yes, we are working very hard on the future of mobility and therefore also on our own future. And yes, at Volkswagen we have recognized how essential a solid foundation of values and a healthy corporate culture is. But at the same time, it s also true that our Group is not yet as good as it could be. We still have quite a way to go. For me, this means one thing in particular: we have many opportunities to turn Volkswagen into an even more successful and an even better company. For our customers, employees and business partners. For the environment and society. For our investors. And for you, our shareholders. Our Group still has enormous potential. We want and we will exploit this. I am looking forward to counting on your continued support as we move forward together on this journey. Sincerely, Matthias Müller

14 The Board of Management To our Shareholders The Board of Management of Volkswagen Aktiengesellschaft Matthias Müller Chairman of the Board of Management of Volkswagen Aktiengesellschaft Prof. Rupert Stadler Chairman of the Board of Management of AUDI AG Hiltrud Dorothea Werner Integrity and Legal Affairs Dr.-Ing. Herbert Diess Chairman of the Brand Board of Management of Volkswagen Passenger Cars

15 To our Shareholders The Board of Management 11 Prof. Dr. rer. pol. Dr.-Ing. E.h. Jochem Heizmann China Frank Witter Finance and Controlling Dr. rer. pol. h.c. Francisco Javier Garcia Sanz Procurement Dr. rer. soc. Karlheinz Blessing Human Resources and Organization Andreas Renschler Commercial Vehicles

16 12 Report of the Supervisory Board To our Shareholders Report of the Supervisory Board (in accordance with section 171(2) of the AktG) Ladies and gentlemen, In fiscal year 2017, the work of the Supervisory Board of Volkswagen AG and its committees focused once again on realigning the Volkswagen Group as part of the Group s TOGETHER Strategy 2025, and the investigation of the diesel issue. The Supervisory Board of Volkswagen AG addressed the Company s position and development regularly and with particular intensity in the reporting period. We supervised and supported the Board of Management in its running of the business and advised it on issues relating to the management of the Company in accordance with our duties under the law, the Articles of Association and the rules of procedure. We also observed the relevant recommendations and suggestions of the German Corporate Governance Code (the Code) at all times. The Supervisory Board was directly involved in all decisions of fundamental importance to the Group. We additionally discussed strategic considerations with the Board of Management at regular intervals. The Board of Management regularly, promptly and comprehensively informed the Supervisory Board in writing or in person on all matters of relevance to the Company relating to its strategy, the business development and the Company s planning and position. This also included the risk situation and risk management. In this respect, the Board of Management also informed it in particular of improvements to the risk and compliance management system with regard to the diesel issue. In addition, the Board of Management informed the Supervisory Board on an ongoing basis about compliancerelated topics and other topical issues. In all cases, we received the documents relevant to our decisions in good time for our meetings. At regular intervals, we also received a detailed report from the Board of Management on the current business position and the forecast for the current year. Any variances in performance that occurred as against the plans and targets previously drawn up were explained by the Board of Management in detail, either in person or in writing. Together with the Board of Management we analyzed the reasons for the variances so as to enable countermeasures to be derived. In addition, the Board of Management presented regular reports on current developments in connection with the diesel issue at the meetings of the Special Committee on Diesel Engines. The Chairman of the Supervisory Board consulted with the Chairman of the Board of Management at regular intervals between meetings to discuss important current issues. Apart from the diesel issue, they included the Volkswagen Group s strategy and planning, the business development, the Group s risk situation and risk management, including integrity and compliance issues. The Supervisory Board held a total of twelve meetings in fiscal year The average attendance ratio was 84.6 %; all of the members of the Supervisory Board attended over half of the meetings of the Supervisory Board and the committees of which they are members. In addition, resolutions on urgent matters were adopted in writing or using electronic communications media.

17 To our Shareholders Report of the Supervisory Board 13 COMMITTEE ACTIVITIES The Supervisory Board has established five committees in order to discharge the duties entrusted to it: the Executive Committee, the Nomination Committee, the Mediation Committee in accordance with section 27(3) of the Mitbestimmungsgesetz (MitbestG German Codetermina-tion Act), the Audit Committee and, since October 2015, the Special Committee on Diesel Engines. The Executive Committee and the Special Committee on Diesel Engines each consist of three shareholder representatives and three employee representatives. The members of the Nomination Committee are the shareholder representatives on the Executive Committee. The remaining two committees are each composed of two shareholder representatives and two employee representatives. The members of these committees as of December 31, 2017 are given on page 87 of this annual report. The Executive Committee met 17 times during the past fiscal year, mainly discussing current matters related to the diesel issue. The Committee also prepared the resolutions by the Supervisory Board in detail and dealt with the composition of, and contractual issues concerning the Board of Management other than remuneration. The Nomination Committee is responsible for proposing suitable candidates for the Supervisory Board to recommend for election to the Annual General Meeting. This Committee did not hold any meetings in The Mediation Committee did not have to be convened in the reporting period. The Audit Committee held five meetings in fiscal year It focused primarily on the consolidated financial statements, the risk management system including the effectiveness of the internal control system, and the work performed by the Company s Compliance organization. In addition, the Audit Committee concerned itself with the Group s quarterly reports and the half-yearly financial report, as well as with current issues and the supervision of financial reporting and the financial reporting process, and the examination thereof by the auditors. Moreover, the Audit Committee initiated the call for bids for audits and other audit-related services in the Volkswagen Group from fiscal year In this process, Volkswagen AG and other public-interest entities of the Volkswagen Group follow the selection procedure within the meaning of Article 16(3) of Regulation (EU) No 537/2014. The Special Committee on Diesel Engines is responsible for coordinating all activities relating to the diesel issue and preparing resolutions by the Supervisory Board. To this end, the Special Committee on Diesel Engines is also provided with regular information by the Board of Management. It is also entrusted with examining any consequences of the findings. The Chairman of the Special Committee on Diesel Engines reports regularly on its work to the Supervisory Board. In fiscal year 2017, the Special Committee on Diesel Engines met on eleven occasions, in which, among other topics, details pertaining to the settlements with the US authorities as well as the Supervisory Board s proposed resolutions regarding formal approval of actions of incumbent members in fiscal year 2016 were discussed. Furthermore, as a rule, the shareholder and employee representatives met for separate preliminary discussions before each of the Supervisory Board meetings. TOPICS DISCUSSED BY THE SUPERVISORY BOARD The Supervisory Board s first meeting in the reporting period was held on January 11, A key topic at this meeting was the approval regarding the conclusion of settlements with US authorities. On January 26, 2017, the Supervisory Board held a conference call to discuss changes in the composition to the Board of Management. At the Supervisory Board meeting on February 24, 2017, we dealt in detail with the new remuneration systems for the Board of Management and Supervisory Board of Volks-

18 14 Report of the Supervisory Board To our Shareholders Hans Dieter Pötsch wagen AG. Following a detailed examination, we also approved the consolidated financial statements and the annual financial statements of Volkswagen AG for 2016 prepared by the Board of Management, as well as the combined management report. We examined the dependent company report submitted by the Board of Management and, following completion of our examination, we came to the conclusion that there were no objections to be raised to the concluding declaration by the Board of Management in the report. In addition, we particularly discussed the current state of affairs with respect to the diesel issue. Another meeting of the Supervisory Board was held on March 28, 2017 at which we mainly discussed the current state of affairs with respect to the diesel issue and the agenda for the 57th Annual General Meeting of Volkswagen AG, particularly the Supervisory Board s proposed resolutions. The Supervisory Board meeting on April 26, 2017 concentrated on strategic topics such as e-mobility and the focus of the China business. Furthermore, the Board of Management reported, among other things, on the collaboration with the monitor.

19 To our Shareholders Report of the Supervisory Board 15 Two more Supervisory Board meetings were held on May 9 and 10, 2017 within Volkswagen AG s 2017 Annual General Meeting. Their agenda included in particular preparations for and the post-completion analysis of the 57th Annual General Meeting of Volkswagen AG on May 10, 2017, the composition of the committees, and the current state of affairs with respect to the diesel issue. A meeting of the Supervisory Board was held on July 26, 2017 at which we addressed the topic of the allegations of supposed cartel infringements that were discussed in the media. In a conference call on August 1, 2017, the Supervisory Board received information on the measures taken as part of the National Forum Diesel. equity of Volkswagen Bank GmbH by Volkswagen Financial Services AG, and an advisory mandate. CONFLICTS OF INTEREST Mr. Hans Dieter Pötsch was a member of the Board of Management of Volkswagen AG until October His move to the Supervisory Board had already been planned irrespective of the diesel issue. In order to avoid conceivable conflicts of interest, Mr. Pötsch always left the meeting room prior to discussions and resolutions adopted by the Supervisory Board that might relate to his conduct in connection with the diesel issue. No other conflicts of interest were reported or were discernible in the reporting period. The agenda of the Supervisory Board meeting on September 29, 2017 included a status report on the Group strategy TOGETHER Strategy 2025 and the current state of affairs with respect to the diesel issue. The Supervisory Board held a meeting on November 2, 2017, in which we discussed not only the current state of affairs with respect to the diesel issue, but also the Volkswagen Group s investment and financial planning. At the Supervisory Board meeting on November 17, 2017, we discussed in detail the Volkswagen Group s investment and financial planning for the period from 2018 to The current state of affairs with respect to the diesel issue was another focus of the meeting. When issuing our annual declaration of conformity with the Code, we also decided on the diversity concepts for the Board of Management and the Supervisory Board as well as the profile of skills and expertise for the Supervisory Board as a whole, and the targets for the composition of the Board. The profile of skills and expertise for the Supervisory Board as a whole, and the targets for the composition of the Board, are described on pages 61 to 62 of the Corporate Governance Report. In addition to the above, we voted in writing on a variety of items in the reporting period, including an increase in the CORPORATE GOVERNANCE AND DECLARATION OF CONFORMITY The Supervisory Board meeting on November 17, 2017 focused on the implementation of the recommendations and suggestions of the Code at the Volkswagen Group. We discussed in detail the version of the Code dated February 7, 2017, as published by the relevant government commission on April 24, 2017, and issued the annual declaration of conformity with the recommendations of the Code in accordance with section 161 of the Aktiengesetz (AktG German Stock Corporation Act) together with the Board of Management. The joint declarations of conformity by the Board of Management and the Supervisory Board are permanently available at Additional information on the implementation of the recommendations and suggestions of the Code can be found in the corporate governance report starting on page 59 and in the notes to the consolidated financial statements on page 312 of this annual report. MEMBERS OF THE SUPERVISORY BOARD AND BOARD OF MANAGEMENT In the election of employee representatives to the Supervisory Board of Volkswagen AG on April 6, 2017, Ms. Ulrike Jakob, Deputy Chairwoman of the Works Council of Volkswagen AG, Kassel plant, Ms. Bertina Murkovic, Deputy Chairwoman of

20 16 Report of the Supervisory Board To our Shareholders the Works Council of Volkswagen Commercial Vehicles, and Mr. Athanasios Stimoniaris, Chairman of the Group Works Council of MAN SE and of the MAN SE Works Council, were elected as members of the Supervisory Board. They succeeded Mr. Uwe Fritsch, Mr. Stephan Wolf and Mr. Thomas Zwiebler. The term of office began at the end of the Annual General Meeting on May 10, The remaining employee representatives on the Supervisory Board were reappointed for a further term. Effective December 14, 2017, the State of Lower Saxony delegated the new Deputy Minister-President and Minister of Economic Affairs, Labor, Transport and Digitalization, Dr. Bernd Althusmann, to the Supervisory Board of Volkswagen AG to succeed Olaf Lies for the latter s remaining term of office. Ms. Annika Falkengren stepped down as a member of the Supervisory Board with effect from February 5, Effective February 14, 2018, the Braunschweig Registry Court temporarily appointed Ms. Marianne Heiß as a member of the Supervisory Board until the end of the Annual General Meeting on May 3, The Supervisory Board will propose electing Ms. Heiß as a member of the Supervisory Board at the Annual General Meeting on May 3, Ms. Hiltrud Dorothea Werner has been the Group Board of Management member responsible for Integrity and Legal Matters since February 1, She succeeded Dr. Christine Hohmann-Dennhardt, who left the Board of Management of Volkswagen AG on January 31, The Honorary Chairman of the Supervisory Board, Dr. Klaus Liesen, passed away on March 30, 2017 at the age of 85. Dr. Liesen served as a member of the Supervisory Board of Volkswagen AG between 1987 and 2006 and as its Chairman from 1987 to During this time, he made a considerable contribution to the expansion and internationalization of the Group. With his experience in business and his shrewd and diplomatic manner, he earned great respect and recognition in the process. Dr. Martin Posth, a former member of the Board of Management of Volkswagen AG, died on September 17, 2017 at the age of 73. Dr. Posth was Board member with responsibility for Human Resources from 1988 to 1993 and for the Asia-Pacific region from 1993 to During his tenure in the Volkswagen Group, he decisively shaped the development of the Company, demonstrating great commitment and expertise. They will not be forgotten. AUDIT OF THE ANNUAL AND CONSOLIDATED FINANCIAL STATEMENTS In line with our proposal, the Annual General Meeting of Volkswagen AG on May 10, 2017 elected PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft (PwC) as auditors for fiscal year The auditors audited the annual financial statements of Volkswagen AG, the consolidated financial statements of the Volkswagen Group and the combined management report, and issued unqualified audit reports in each case. The Supervisory Board commissioned (PwC) on November 17, 2017 with an external content-related audit of the combined separate nonfinancial report for In addition, the auditors analyzed the risk management and internal control systems, concluding that the Board of Management had taken the measures required by section 91(2) of the AktG to ensure early detection of any risks endangering the continued existence of the Company. The Report by the Board of Management on Relationships of Volkswagen AG with Affiliated Companies in Accordance with Section 312 of the AktG for the period from January 1 to December 31, 2017 (dependent company report) submitted by the Board of Management was also reviewed by the auditors, who issued the following opinion: In our opinion and in accordance with

21 To our Shareholders Report of the Supervisory Board 17 our statutory audit, we certify that the factual disclosures provided in the report are correct and that the Company s consideration concerning legal transactions referred to in the report was not unduly high. The members of the Audit Committee and the members of the Supervisory Board were provided in each case with the documentation relating to the annual financial statements, including the dependent company report, and the audit reports prepared by the auditors in good time for their meetings on February 22, 2018 and February 23, 2018 respectively and the report from PwC on the external contentrelated audit of the combined separate nonfinancial report for The auditors reported extensively at both meetings on the material findings of their audit and were available to provide additional information. Taking into consideration the audit reports and the discussion with the auditors and based on its own conclusions, the Audit Committee prepared the documents for the Supervisory Board s examination of the consolidated financial statements, the annual financial statements of Volkswagen AG, the combined management report, the dependent company report as well as the combined separate nonfinancial report and reported on these at the Supervisory Board meeting on February 23, Following this, the Audit Committee recommended that the Supervisory Board approve the annual financial statements. We examined the documents in depth in the knowledge and on the basis of the report by the Audit Committee and the audit report as well as in talks and discussions with the auditors. We came to the conclusion that they are due and proper and that the assessment of the position of the Company and the Group presented by the Board of Management in the management report corresponds to the assessment by the Supervisory Board. We therefore concurred with the auditors findings and approved the annual financial statements prepared by the Board of Management and the consolidated financial statements at our meeting on February 23, 2018, at which the auditors also took part in discussions on the agenda items relating to the financial statements. The annual financial statements are thus adopted. Upon completion of our examination of the dependent company report, there are not any objections to be raised to the concluding declaration by the Board of Management. We reviewed the proposal on the appropriation of net profit submitted by the Board of Management, taking into account in particular the interests of the Company and its shareholders, and endorsed the proposal. PwC conducted an external content-related audit of the combined separate nonfinancial report for 2017 to attain limited assurance and issued an unqualified report. Upon completion of its own independent examination of the combined separate nonfinancial report for 2017, the Supervisory Board did not have any objections. We would like to express our thanks and particular appreciation to the members of the Board of Management, the Works Council, the management and all the employees of Volkswagen AG and its affiliated companies for their work in With your immense personal commitment, great loyalty and readiness to support the changes implemented, you all helped the Volkswagen Group to conclude fiscal year 2017 successfully and develop positively in many areas under the Group s TOGETHER Strategy Wolfsburg, February 23, 2018 Hans Dieter Pötsch Chairman of the Supervisory Board

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23 2 Divisions DIVISIONS

24 DIVISIONS 21 Brands and Business Fields 24 Volkswagen Passenger Cars 26 Audi 28 ŠKODA 30 SEAT 32 Bentley 34 Porsche 36 Volkswagen Commercial Vehicles 38 Volkswagen Truck & Bus 40 Scania 42 MAN 44 Volkswagen Group China 46 Volkswagen Financial Services

25 Divisions Brands and Business Fields 21 Brands and Business Fields Amid fierce competition in a market environment that remained challenging, we achieved a new vehicle sales record with our brands in Special items from the diesel issue again affected the operating profit. GROUP STRUCTURE The Volkswagen Group consists of two divisions: the Automotive Division and the Financial Services Division. The Automotive Division comprises the Passenger Cars, Commercial Vehicles and Power Engineering business areas. We report on the Passenger Cars segment and the reconciliation in the Passenger Cars Business Area. The Commercial Vehicles Business Area and Power Engineering Business Area correspond to the segments of the same name. Accordingly, the activities of the Automotive Division comprise the development of vehicles and engines, the production and sale of passenger cars, light commercial vehicles, trucks, buses and motorcycles, as well as the genuine parts, large-bore diesel engines, turbomachinery, special gear units, propulsion components and testing systems businesses. The Ducati brand is allocated to the Audi brand and thus to the Passenger Cars Business Area. The Financial Services Division, which corresponds to the Financial Services segment, combines dealer and customer financing, leasing, banking and insurance activities, fleet management and the mobility offerings. VOLKSWAGEN GROUP REPORTING STRUCTURE AUTOMOTIVE DIVISION FINANCIAL SERVICES DIVISION Passenger Cars Business Area Volkswagen Passenger Cars Audi ŠKODA SEAT Bentley Porsche Automotive Others Commercial Vehicles Business Area Volkswagen Commercial Vehicles Scania Vehicles and Services MAN Commercial Vehicles Power Engineering Business Area MAN Power Engineering Dealer and customer financing Leasing Direct bank Insurance Fleet management Mobility offerings

26 22 Brands and Business Fields Divisions In this chapter, we present the key volume and financial data relating to the Group brands and to Volkswagen Financial Services. In light of the considerable importance of the development of business in the world s largest single market for the Volkswagen Group, we also report on business developments and the results of our activities in China in this chapter. The production figures and deliveries to customers are differentiated by brands and their models that carry the corresponding brand logo. Unit sales figures contain vehicles sold by respective brand companies, including models of other Group brands. In some cases, there are marked differences between delivery figures and unit sales as a result of our business development in China. When realigning our Group structures, we have reclassified companies from the Volkswagen Passenger Cars brand to the Group starting in This will allow us to increase transparency and comparability. Along with cross-brand logistics and services, importers that also distribute vehicles from other Group brands have been separated out from the Volkswagen Passenger Cars brand. These will be disclosed in the line Other and will continue to be presented in the Passenger Cars Business Area. For the Volkswagen Passenger Cars brand, the reclassifications lead to reductions in unit sales, sales revenue and operating profit. In addition, we explain unit sales and sales revenue in the Europe/Other markets, North America, South America and Asia-Pacific regions. KEY FIGURES BY MARKET At 17.0 (14.6) billion, the operating profit before special items in fiscal year 2017 exceeded the prior-year figure. Special items, which resulted solely from the diesel issue in the reporting year, weighed on the operating profit by 3.2 billion (previous year: operating profit reduced by 7.5 billion). Amid fierce competition in a challenging market environment, the Volkswagen Group set a new sales record of 10.8 (10.4) million vehicles in fiscal year Sales revenue increased by 6.2% to billion. In the Europe/Other markets region, unit sales rose by 2.1% year-on-year to 4.7 million vehicles. At billion, sales revenue was 3.4% higher than in 2016, due among other things to higher volumes. Exchange rate effects had a negative impact. In North America, we sold 1.0 million vehicles, a 2.5% increase compared with the previous year, driven by stronger demand in the USA and Canada. Volume and mix effects lifted sales revenue by 9.5% to 38.8 billion. The economic environment in the markets of the South America region improved during the reporting year. The Volkswagen Group s sales there rose by 25.1% to 0.5 million vehicles. Sales revenue rose by 25.3% to 10.0 billion, which was due both to higher volumes and positive mix effects. In the Asia-Pacific region including the Chinese joint ventures we sold a total of 4.5 (4.4) million vehicles in fiscal year At 39.1 billion, sales revenue exceeded the prior year by 9.4%. This increase especially resulted from a higher import volume and an improved components business at our fully consolidated companies. This figure does not include the sales revenue of our equity-accounted Chinese joint ventures.

27 Divisions Brands and Business Fields 23 KEY FIGURES BY BRAND AND BUSINESS FIELD 1 VEHICLE SALES SALES REVENUE OPERATING RESULT Thousand vehicles/ million Volkswagen Passenger Cars 2 3,573 4,347 79, ,651 3,301 1,869 Audi 1,530 1,534 60,128 59,317 5,058 4,846 ŠKODA ,559 13,705 1,611 1,197 SEAT ,892 8, Bentley ,843 2, Porsche Automotive ,674 20,710 4,003 3,733 Volkswagen Commercial Vehicles ,909 11, Scania ,789 11,303 1,289 1,072 MAN Commercial Vehicles ,087 10, MAN Power Engineering 3,283 3, VW China 5 4,020 3,873 Other ,638 30,288 56,617 2,335 1,343 Volkswagen Financial Services 7 31,826 27,554 2,460 2,105 Volkswagen Group before special items 17,041 14,623 Special items 3,222 7,520 Volkswagen Group 10,777 10, , ,267 13,818 7,103 Automotive Division 8 10,777 10, , ,016 11,146 4,668 of which: Passenger Cars Business Area 10,077 9, , ,343 9,309 4,167 Commercial Vehicles Business Area ,200 32,080 1, Power Engineering Business Area 3,283 3, Financial Services Division 33,733 31,251 2,673 2,435 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts figures take account of the reclassification of companies; prior-year figures were not adjusted. 3 Porsche (Automotive and Financial Services): sales revenue 23,491 (22,318) million, operating profit 4,144 (3,877) million. 4 Including financial services. 5 The sales revenue and operating profits of the joint venture companies in China are not included in the figures for the Group. These Chinese companies are accounted for using the equity method and recorded a proportionate operating profit of 4,746 (4,956) million. 6 Prior year adjusted. In operating profit, mainly intragroup items recognized in profit or loss, in particular from the elimination of intercompany profits; the figure includes depreciation and amortization of identifiable assets as part of purchase price allocation for Scania, Porsche Holding Salzburg, MAN and Porsche. 7 Starting January 1, 2017, Porsche s financial services business is reported as part of Volkswagen Financial Services. Prior-year figures were not adjusted. 8 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. KEY FIGURES BY MARKET 1 VEHICLE SALES SALES REVENUE Thousand vehicles/ million Europe/Other markets 4,731 4, , ,079 North America ,818 35,454 South America ,988 7,973 Asia-Pacific 2 4,527 4,367 39,123 35,761 Volkswagen Group 2 10,777 10, , ,267 1 All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. 2 The sales revenue of the joint venture companies in China is not included in the figures for the Group and the Asia-Pacific market.

28 24 Volkswagen Passenger Cars Divisions The Volkswagen Passenger Cars brand systematically pushed ahead with its Transform strategy in 2017 and considerably improved its operating profit. The global product initiative has launched successfully with more than ten new models. BUSINESS DEVELOPMENT The Volkswagen Passenger Cars vision is Moving people and driving them forwards. The TRANSFORM strategy therefore centers on a global model initiative through which the brand aims to lead innovation, technology and quality in the volume segment. More than ten new models were launched on the market in the reporting year. The Arteon, Volkswagen s new top-of-the-range saloon, received the Golden Steering Wheel 2017, among other accolades. The Polo set new benchmarks in the small car segment. In the SUV segment, the brand expanded its range with the young, sporty T-Roc, the Tiguan Allspace, the Atlas for the US market and the Teramont for China. Volkswagen wants to actively shape the current phase of technological transformation in the automotive industry. The brand is therefore developing a new generation of fully networked electric vehicles based on the Modular Electrification Toolkit (MEB). The MEB concept car, the I.D. BUZZ, turned heads at the Detroit Auto Show: This fully electric microbus brings the legendary VW camper-van feeling right up to date. The brand showcased another member of the I.D. family in 2017: the I.D. CROZZ concept SUV. The first vehicles in the I.D. family are being produced at the Zwickau site, which is being developed into the Group s European center of expertise for e-mobility. Worldwide, the Volkswagen Passenger Cars brand delivered a record 6.2 million vehicles in 2017 (+4.2%). While sales slipped slightly in Germany due to the diesel issue, they rose in all other core regions of the world. The brand recorded strong growth above all in China (+5.9%), Brazil (+19.7%) and the USA (+5.2%). The Tiguan was especially popular. With 720,000 vehicles delivered in the reporting year, it was one of the world s most successful automobiles in Sales by the Volkswagen Passenger Cars brand in 2017 totaled 3.6 (4.3) million vehicles; the decline results from the reclassification of companies in the Group. The difference between deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to Volkswagen Passenger Cars brand companies. The Volkswagen Passenger Cars brand produced 6.3 million vehicles worldwide in 2017; this was 4.0% more than in In late August, the 150 millionth Volkswagen rolled off the assembly line at Volkswagen s main plant in Wolfsburg. SALES REVENUE AND EARNINGS Sales revenue at the Volkswagen Passenger Cars brand in 2017 was down 24.3% year-on-year at 80.0 billion. This was due to the reclassification of companies. Operating profit before special items rose to 3.3 (1.9) billion. Volume-, mix- and margin-related factors as well as product cost optimization had a positive effect, while higher fixed costs as a result of expansion and higher depreciation and amortization charges due to the large volume of capital expenditure had a negative impact. The operating return on sales before special items increased to 4.1 (1.8)%. The diesel issue gave rise to special items of 2.8 (previous year s total 5.2) billion. 150 million Vehicles manufactured since 1945

29 Divisions Volkswagen Passenger Cars 25 PRODUCTION VOLKSWAGEN PASSENGER CARS BRAND 1 Units % Golf 968, ,495 Jetta/Sagitar 883, ,135 Tiguan 769, ,687 Polo 755, ,388 Passat/Magotan 660, ,878 Lavida 507, ,187 Bora 334, ,427 Santana 293, ,177 Gol 203, ,130 up! 158, ,970 Touran 144, ,248 Lamando 138, ,285 Atlas/Teramont 129, Saveiro 66,431 47,460 Beetle 59,483 61,940 Fox 50,739 50,273 Sharan 45,695 41,949 Touareg 42,407 47,495 Arteon/CC 37,972 44,091 T-Roc 22,724 Suran 21,093 20,163 Phideon 13,014 5,131 Scirocco 8,199 11,963 Phaeton 452 6,316,832 6,073,310 Deliveries (thousand units) 6,230 5, Vehicle sales 3,573 4, Production 6,317 6, Sales revenue ( million) 79, , Operating result before special items 3,301 1, as % of sales revenue figures take account of the reclassification of companies; prior-year figures were not adjusted. T-Roc DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 30.1 % 9.5 % 6.7 % 53.7 % i FURTHER INFORMATION

30 26 Audi Divisions Audi set another sales record in The new generation of the Audi A8 is designed for highly automated driving. The Audi AI trademark will prospectively stand for autonomy, intelligence and innovation. BUSINESS DEVELOPMENT Vorsprung is an active brand promise that is delivered throughout the world, making Audi one of the most highly desired brands in the premium segment. In 2017, the brand with the four rings unveiled the new Audi A8. At the first Audi Summit, it also presented further technological milestones in cutting-edge fields such as sustainable production, lightweight construction, connectivity, automated driving and digital services. The fourth generation of the A8, Audi s flagship, is rolling off the assembly line as the world s first production model designed for highly automated driving. The Audi AI trademark will prospectively stand for autonomy, intelligence and innovation. The Audi of the future will use machine learning to continuously develop its capabilities, adapt to users individual needs and suggest services. This will make our customers lives easier and their journeys safer. In the 2017 fiscal year, the Audi brand set a new sales record, delivering 1.9 million vehicles (+0.6%). Sales increased in North America (+8.4%) and China (+1.1%), among other regions. Audi sold 1.5 (1.5) million vehicles in The Chinese joint venture FAW-Volkswagen sold a further 552 (536) thousand Audi vehicles. The Q2 and A5 models proved particularly popular with customers. Unit sales at Automobili Lamborghini S.p.A. amounted to 3,897 (3,465) vehicles. Audi produced 1.9 (1.9) million vehicles globally in the reporting year; this was 1.3% fewer than in the previous year. At Lamborghini, production of the Urus, the world s first super sport utility vehicle, started in Lamborghini produced a total of 4,056 (3,579) vehicles in the reporting period. SALES REVENUE AND EARNINGS At 60.1 billion, sales revenue for the Audi brand in 2017 exceeded the prior-year figure by 0.8 billion. At 5.1 (4.8) billion, operating profit before special items was higher than in the previous year. Product cost optimization and improved price positioning had a positive effect. This was offset by, among other factors, higher depreciation and amortization charges connected with the expansion of the international model and technology portfolio as well as international production structures. The operating return on sales before special items amounted to 8.4 (8.2)%. The diesel issue gave rise to special items of 0.4 (previous year s total 1.8) billion. The financial key performance indicators for the Lamborghini and Ducati brands are included in the financial figures for the Audi brand. A8 Highly automated driving

31 Divisions Audi 27 PRODUCTION AUDI BRAND Units % Audi A4 325, ,999 A3 313, ,983 Q5 289, ,750 A6 259, ,211 Q3 205, ,452 A5 119,595 65,117 Q7 106, ,344 Q2 102,084 19,419 A1 95, ,252 TT 22,174 26,886 A7 16,968 26,308 A8 15,854 24,179 R8 3,179 3,688 Q8/e-tron 368 1,875,353 1,899,588 Deliveries (thousand units) 1,882 1, Audi 1,878 1, Lamborghini Vehicle sales 1,530 1, Production 1,879 1, Sales revenue ( million) 60,128 59, Operating result before special items 5,058 4, as % of sales revenue Lamborghini Huracán Coupé 1,822 1,315 Aventador Coupé 1, Huracán Spyder 827 1,104 Aventador Roadster Urus 121 4,056 3,579 Audi brand 1,879,409 1,903,167 A8 DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 48.4 % 14.8 % 1.2 % 35.6 % i FURTHER INFORMATION

32 28 ŠKODA Divisions The ŠKODA brand continued its SUV initiative in fiscal year 2017 with the new Karoq. The model helped ŠKODA achieve a new sales record, with 1.2 million vehicles delivered. BUSINESS DEVELOPMENT Intelligent concepts and excellent value for money are the hallmarks of the successful ŠKODA brand. In line with its motto, Simply Clever, it combines future-oriented functionality with an impressive space concept that is technically simple but delivers sophisticated and practical features. ŠKODA celebrated the world premiere of the new Karoq in 2017, expanding the Czech brand s range of SUV models. The robust, compact vehicle has been completely redeveloped with the emotional and dynamic features of ŠKODA s new SUV design language. The vehicle offers exceptional spaciousness, new driver assistance systems, full-led headlights and for the first time in a ŠKODA a freely programmable digital instrument panel. In addition, ŠKODA presented the Vision E concept car in The electric-powered concept vehicle enables highly automated driving and takes vehicle-driver connectivity to a new level. Worldwide, the ŠKODA brand delivered 1.2 million vehicles to customers in the reporting year (+6.6%), thereby achieving a new sales record. China, where deliveries increased by 2.5%, was once again the brand s largest single market. Sales in Western Europe rose by 5.2%. They were up 13.3% in Central and Eastern Europe. ŠKODA s unit sales rose year-on-year to 937 (814) thousand vehicles in The new Kodiaq met with a very positive reception in the market and had a major part in boosting unit sales. The difference between figures for deliveries and unit sales is mainly due to the fact that the vehicle-producing joint ventures in China are not attributed to ŠKODA brand companies. ŠKODA produced 1.2 (1.2) million vehicles worldwide across seven series in fiscal year At the end of September 2017, the plant in Kvasiny, Czech Republic, produced the 20 millionth vehicle since the brand was established. SALES REVENUE AND EARNINGS The ŠKODA brand s sales revenue increased by 20.8% year-on-year to 16.6 billion in the past fiscal year. Operating profit improved by 34.6% to 1.6 billion; the increase resulted above all from the higher volume and mix effects, with exchange rate effects having a positive and an increase in fixed costs a negative impact. Operating return on sales rose from the previous year s 8.7% to 9.7%. 20 million Number of vehicles produced since the establishment of the brand

33 Divisions ŠKODA 29 PRODUCTION ŠKODA BRAND Units % Octavia 420, ,415 Rapid 210, ,603 Fabia 209, ,308 Superb 147, ,880 Kodiaq 123,982 1,167 Karoq/Yeti 81,963 95,417 Citigo 38,749 41,247 1,232,072 1,152,037 Deliveries (thousand units) 1,201 1, Vehicle sales Production 1,232 1, Sales revenue ( million) 16,559 13, Operating result 1,611 1, as % of sales revenue Karoq DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 70.4 % 0.0 % 0.1 % 29.5 % i FURTHER INFORMATION

34 30 SEAT Divisions In addition to the fifth generation of the Ibiza, the SEAT brand also unveiled its compact Arona in the reporting year, expanding its range of SUVs. The previous year s positive performance continued in impressive fashion in the results for BUSINESS DEVELOPMENT SEAT delivers solutions Created in Barcelona to make mobility easy. Having entered the SUV market for the first time in the previous year with the Ateca, the Spanish brand continued this path in fiscal year 2017, presenting a further model series in the form of the Arona. This marries the benefits of compact dimensions with the features of a crossover model and underscores the brand s sporty and dynamic claim with its attractive design. It also boasts a wealth of driver assistance systems and impressive connectivity. Other models presented in 2017 included the limited-edition Leon CUPRA R and the new generation Ibiza. The Ibiza is the first model to be based on the Modular Transverse Toolkit and marks a decisive step into the future for the brand. SEAT increased its deliveries to customers by 14.6% in 2017 to 468 thousand vehicles. Almost all markets contributed to this rise, with the most significant increases achieved in Poland (+24.8%), Spain (+23.1%), the United Kingdom (+18.3%), France (+15.6%) and Germany (+13.4%). This made SEAT one of the fastest-growing brands in Europe. The Ibiza, Leon and Ateca models were particularly popular with customers, and the new Arona was positively received by the market. The SEAT brand sold 595 thousand units in the reporting period. This was 8.5% more than in the previous year. The Q3 produced for Audi is included in this figure. In 2017, SEAT produced 479 thousand vehicles, an increase of 14.9% year-on-year. SALES REVENUE AND EARNINGS SEAT continued its upward trend in fiscal year At 9.9 billion, sales revenue exceeded the previous year s record figure by 11.2%. Operating profit improved by 24.8% to 191 (153) million, another new record. Negative effects from cost increases were compensated for by the higher volume, positive mix effects and improved margins. The SEAT brand s operating return on sales was 1.9 (1.7)%. 24.8% Increase in profit in 2017

35 Divisions SEAT 31 PRODUCTION SEAT BRAND Units % Leon 163, ,228 Ibiza 160, ,988 Ateca 77,483 35,833 Alhambra 33,638 31,214 Arona 17,527 Mii 13,825 18,720 Toledo 13,146 18, , ,012 Deliveries (thousand units) Vehicle sales Production Sales revenue ( million) 9,892 8, Operating result as % of sales revenue Arona DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 94.5 % 5.3 % 0.2 % 0.0 % i FURTHER INFORMATION

36 32 Bentley Divisions In 2017, Bentley celebrated the world premiere of the third generation of its best-selling Continental GT Coupé, which sets new standards in the luxury grand tourer segment. BUSINESS DEVELOPMENT The Bentley brand is defined by exclusivity, elegance and power. The third generation of the successful Continental GT debuted at the IAA in Frankfurt am Main in the reporting year. The vehicle sets new standards in the luxury grand tourer segment. Compared to its predecessor, it has a longer bonnet, a flatter front end and an extra-wide radiator grille. The exclusive interior features a virtual cockpit and a 12.3-inch foldaway touchscreen in the center console. The W12 engine puts an impressive 467 kw (635 PS) to the wheels. The Bentayga Diesel, launched in 2017, is the luxury brand s first model to be equipped with a diesel engine. A hybrid version will follow in 2018, marking Bentley s first step into the world of electric driving. Bentley delivered 11,089 (11,023) vehicles to customers in the reporting period, exceeding the previous year s record figure. While deliveries declined by 6.8% in the USA, the brand s largest single market, they rose by 15.7% in Asia-Pacific and 1.5% in Europe. At 10,566 (11,298) vehicles worldwide in 2017, the Bentley brand s unit sales were lower than in the previous year; this was above all attributable to the new generation of the Continental GT Coupé. The highest demand was recorded for the Bentayga. Bentley produced 10,552 vehicles in 2017; the year-on-year decline of 10.7% was attributable to the production cycle. SALES REVENUE AND EARNINGS Bentley recorded sales revenue of 1.8 billion in the past fiscal year, a decline of 9.2% compared to Operating profit declined to 55 (112) million; negative volume-, price- and mix-related effects were offset by positive exchange rate effects and lower expenses from the development of the model portfolio. The operating return on sales stood at 3.0 (5.5)%. 3 rd generation Continental GT Coupé

37 Divisions Bentley 33 PRODUCTION BENTLEY BRAND Units % Bentayga 4,849 5,586 Flying Spur 2,295 1,731 Continental GT Convertible 1,468 1,600 Continental GT Coupé 1,345 2,272 Mulsanne ,552 11,817 Deliveries (units) 11,089 11, Vehicle sales 10,566 11, Production 10,552 11, Sales revenue ( million) 1,843 2, Operating result as % of sales revenue Continental GT DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 48.5 % 23.6 % 0.1 % 27.9 % i FURTHER INFORMATION

38 34 Porsche Divisions The millionth Porsche 911 rolled off the production line in the past fiscal year. The sports car manufacturer entered a new segment with the Panamera Sport Turismo. The year brought new records in terms of unit sales, sales revenue and profit. BUSI N ESS DEVELOPMENT Exclusivity and social acceptance, innovation and tradition, performance and everyday usability, design and functionality these are the brand values of sports car manufacturer Porsche. In 2017, Porsche put these values into practice in impressive form with the new generation of the Cayenne: the SUV has been completely redeveloped and embodies the typical Porsche attributes better than ever. Even though it comes with more standard features, the Cayenne is up to 65 kg lighter than its predecessor thanks to its lightweight construction. The Cayenne Turbo, the top-of-the-range model in the series, raises the bar for sporty performance in its segment even further. The car s four-liter V8, twin-turbo engine puts out 404 kw (550 PS) of power, accelerating it from 0 to 100 km/h in 4.1 seconds. Porsche s launch of the Sport Turismo, a new bodywork variant of the Panamera, has taken the brand into a new segment. The Sport Turismo uses all the technical and conceptual innovations featured in the Panamera series, which gained a second hybrid version in the reporting year with the 500 kw (680 PS) Panamera Turbo S E-Hybrid. In 2017, Porsche came first in the world s toughest longdistance event in Le Mans for the third time in succession and also won the third consecutive championship title in the WEC world endurance championships. The Porsche brand delivered 246 thousand sports cars in the past fiscal year; this was 3.6% more than in the previous year. China remained the largest single market for Porsche with deliveries of 72 thousand vehicles (+9.6%). In North America, sales rose by 3.7%. At 248 thousand vehicles, Porsche s unit sales exceeded the prior-year figure by 3.7% in Above all, the new Panamera saw marked sales growth. Porsche celebrated a special anniversary in 2017, when the millionth 911 rolled off the production line at the main plant in Zuffenhausen. In total, Porsche produced 256 thousand vehicles in the reporting year. This was 6.7% more than in SALES REVENU E AND EARN INGS Starting January 1, 2017, Porsche s financial services business is reported as part of Volkswagen Financial Services. The 2017 fiscal year was once again very successful for Porsche: Porsche Automotive s sales revenue rose by 4.7% to 21.7 (20.7) billion. Operating profit improved by 7.2% to 4.0 billion; despite cost increases, the increase resulted particularly from the higher volume. The operating return on sales amounted to 18.5 (18.0)%. 1 million Porsche 911s produced

39 Divisions Porsche 35 PRODUCTION PORSCHE AUTOMOTIVE 1 Units % Macan 98,763 97,177 Cayenne 59,068 71,693 Panamera 37,605 14, Coupé/Cabriolet 33,820 31, Boxster/Cayman 26,427 24, , ,618 Deliveries (thousand units) Vehicle sales Production Sales revenue ( million) 21,674 20, Operating result 4,003 3, as % of sales revenue Porsche (Automotive and Financial Services): sales revenue 23,491 (22,318) million, operating profit 4,144 (3,877) million. Cayenne DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 35.3 % 26.5 % 1.0 % 37.2 % i FURTHER INFORMATION

40 36 Volkswagen Commercial Vehicles Divisions Volkswagen Commercial Vehicles continued to move towards emission-free urban mobility and logistics in fiscal year 2017; the e-crafter is currently in the final stage of real-world testing. Deliveries and production hit new heights in the reporting year. BUSINESS DEVELOPMENT Volkswagen Commercial Vehicles stands for superior mobility with its three core values reliability, profitability and partnership. The new Crafter celebrated a successful market launch in The vehicle has been completely redesigned based on customer requirements and offers customer-friendly functionality and practical, everyday solutions for the most diverse of transport needs in all areas of use. The e-crafter, currently undergoing final real-world testing with major customers, is to be launched on the market in 2018, setting new standards for trade vehicles, municipal vehicle fleets and courier services in terms of emission-free urban logistics. The California XXL study also attracted attention in the reporting year. Based on the new Crafter and featuring a fixed, high panoramic roof, an extended rear end and user-friendly interior space, the concept demonstrates what a potential big brother for the California could look like in future. More than 15 thousand units of the current California, Europe s most popular campervan, were produced in 2017; this was approximately 20% more than in the previous record year Volkswagen Commercial Vehicles delivered 498 thousand vehicles in the past fiscal year, an increase of 4.2% compared with Sales in Europe rose 2.6%, while in South America they climbed by 28.1%. Volkswagen Commercial Vehicles sold 498 thousand vehicles in the reporting year, a rise of 4.1%. The Multivan/Transporter and Caddy models were particularly popular. Production by the Volkswagen Commercial Vehicles brand increased by 16.0% in 2017 to 490 thousand vehicles. These figures include the Crafter, which is manufactured at the new plant in Wrzesnia, Poland. We also manufacture the Caddy and the T6 in Poland. The main plant in Hanover produces the Amarok, Caravelle/ Multivan and Transporter models. The Amarok is also produced in Argentina. SALES REVENUE AND EARNINGS Volkswagen Commercial Vehicles generated sales revenue of 11.9 (11.1) billion in fiscal year Despite higher costs resulting from expansion of the production network, operating profit climbed 87.6% to 853 million due to margin, volume and exchange rate effects as well as product cost optimization. The operating return on sales improved considerably to 7.2 (4.1)%. 87.6% Increase in profit in 2017

41 Divisions Volkswagen Commercial Vehicles 37 PRODUCTION VOLKSWAGEN COMMERCIAL VEHICLES BRAND Units % Caravelle/Multivan, Kombi 115, ,554 Caddy Kombi 93,167 86,841 Transporter 92,876 81,932 Amarok 80,328 63,367 Caddy 71,501 71,757 Crafter 36, , ,047 Deliveries (thousand units) Vehicle sales Production Sales revenue ( million) 11,909 11, Operating result as % of sales revenue California DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 84.3 % 2.1 % 8.3 % 5.3 % i FURTHER INFORMATION

42 38 Volkswagen Truck & Bus Divisions VOLKSWAGEN TRUCK & BUS Volkswagen Truck & Bus made further steps in 2017 towards its strategic objective of becoming a global industry champion. It was helped by innovative cooperation projects between the Volkswagen Truck & Bus brands and the strategic alliance partner Navistar. Volkswagen Truck & Bus aims to become the industry s global champion. Volkswagen Truck & Bus already leads the truck market in Europe and in Brazil. In the coming decade, we want to lead the industry in terms of profitability, innovation for our customers, employee satisfaction and global presence. Volkswagen Truck & Bus operates under the motto Driving transportation to the next level. The key to putting this into practice is to promote cooperation in research and development between the brands. An office coordinates the joint development activities across brands and countries and helps the brands get new technologies to market faster. An example is the joint e-drivetrain platform being designed to revolutionize electric driving in the Group. Parts of the platform are to be used in various Volkswagen Truck & Bus vehicles, such as the electric-powered city buses from MAN and Scania. The first of these buses will be delivered to selected European cities in 2018, including Hamburg and Paris. Our alliance partner Navistar is also planning to use the joint e-drivetrain platform. With the launch of the RIO platform at the end of 2017, Volkswagen Truck & Bus cemented its role as a digitalization pioneer. The cloud-based platform is also available to all other brands and new partners. Since January 2018, the RIO box has been available for retrofitting in all vehicles with a fleet management interface. RIO is thus also suited to mixed fleets containing vehicles of different brands. Since August 2017, every MAN truck delivered in Europe has been fitted with the RIO box with access to the RIO platform as a standard feature. Volkswagen Truck & Bus is already Europe s market leader for networked trucks. Scania, Volkswagen Caminhões e Ônibus, Volkswagen Commercial Vehicles and the strategic partner Navistar are also planning to use the RIO platform in future. 211 thousand Vehicles produced

43 Divisions Volkswagen Truck & Bus 39 PRODUCTION DELIVERIES Units Units Trucks 188, ,354 Buses 19,217 18,713 Light Commercial Vehicles 3, , ,067 Trucks 183, ,806 Buses 19,218 17,775 Light Commercial Vehicles 2, , ,581 Strong brands DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 73.3 % 1.5 % 16.9 % 8.4 %

44 40 Scania Divisions Scania expanded its new generation of trucks with vehicles for the construction industry in New solutions were also presented for sustainable transport in cities. BUSINESS DEVELOPMENT The Swedish brand Scania follows its values Customer first, Respect for the individual, Elimination of waste, Determination, Team Spirit and Integrity. Scania continued to introduce its new generation of trucks in the reporting year and presented a range of products and services with a special focus on the construction industry. The vehicles are characterized by a robust design and meet the highest standards in respect of reliability and productivity. Scania also presented forward-looking solutions for low-emission transport in cities: the lighter trucks, powered by the new 7-liter range of engines, offer fuel savings of up to 10% for urban transport companies and take efficient transport to a new level. Further engine and cab options were also introduced in 2017, such as the new 13-liter gas-powered engine for long-distance transport and the latest generation of V8 engines. With the hybrid version of the Interlink Low Decker and the battery-powered Citywide Low Floor, Scania boosted its range of buses with alternative drive systems. Scania One, the new digital platform for connected services, enables fleet owners and drivers to access Scania s connected services and optimize the coordination of their transport assignments. The Scania R 450 was voted Green Truck of the Year in a poll by industry magazines to crown the most environmentally friendly commercial vehicles. The key figures presented in this chapter encompass Scania s truck and bus, industrial and marine engines and financial services businesses. Orders at the Scania brand were up 27.9% year-on-year to 109 thousand vehicles in fiscal year Scania s leading position in Euro 6 engines, long experience with consumption-optimized vehicles and the wide range of alternative drive systems contributed to growing order books in Western Europe. Globally, Scania delivered 91 (81) thousand vehicles to customers. Sales in Europe were up year-on-year, and impressive increases were also recorded in Brazil. At 8 (8) thousand vehicles, deliveries of buses remained on a level with the previous year. Demand for services and replacement parts as well as for Scania Financial Services was again higher in 2017 than in the previous year. The Scania brand produced 96 (84) thousand commercial vehicles in the reporting period (+14.1%), including 8 (8) thousand buses. SALES REVENUE AND EARNINGS Sales revenue at the Scania brand was up 1.5 billion year-on-year at 12.8 (11.3) billion. Operating profit (previous year s figure excludes special items) improved to 1.3 (1.1) billion. This was due to higher vehicle sales and an expansion of the service business. In the reporting period, the operating return on sales (previous year s figure excludes special items) amounted to 10.1 (9.5)%. 1.3 billion Operating profit for 2017

45 Divisions Scania 41 PRODUCTION SCANIA BRAND Units % Trucks 87,454 75,452 Buses 8,327 8,488 95,781 83,940 Orders received (thousand units) Deliveries Vehicle sales Production Sales revenue ( million) 12,789 11, Operating result 1 1,289 1, as % of sales revenue In the previous year before special items. R 650 DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 75.2 % 0.9 % 12.3 % 11.6 % i FURTHER INFORMATION

46 42 MAN Divisions MAN successfully launched the MAN TGE van in the 2017 fiscal year and is now a comprehensive provider for all transport needs. The future program continued to have a positive impact. BUSINESS DEVELOPMENT Customer focus, enthusiasm for the product and efficiency are the core values at MAN. A new era began for MAN in 2017 with the market launch of the MAN TGE, the first light commercial vehicle from the long-established Munich-based brand. The MAN TGE is a response to high demand from logistics businesses, customer service providers and tradespeople, as well as from couriers, express and parcel delivery services. The vehicle turns MAN into a comprehensive solution provider for all transport needs. MAN also presented its e-delivery: an electric-powered distribution truck for urban logistics. The vehicle ought to be manufactured in Brazil. The new Lion s Coach also celebrated its premiere; optimized reinforcement enables it to meet the safety standards introduced in November The NEOPLAN Tourliner received the renowned if product design award in the reporting period. In Power Engineering, MAN presented a new high-performance diesel engine for its 4x line. The 45/60CR will initially be available in 12V and 14V versions boasting power outputs of 15,600 kw and 18,200 kw respectively. In South America, MAN Commercial Vehicles recorded rising demand in fiscal year 2017 due to the improved economic environment. MAN also continued to expand in the European commercial vehicle market. Orders received increased by 13.9% in total to 120 thousand vehicles. Deliveries were up year-on-year at 114 (102) thousand commercial vehicles, including 11 (10) thousand buses. MAN produced 116 (102) thousand commercial vehicles in the reporting year, of which 11 (10) thousand were buses. Incoming orders in the Power Engineering Business Area increased by 3.7 (3.3) billion despite the continued difficult situation in the shipping industry, economic difficulties in emerging markets and the low price of oil. SALES REVENUE AND EARNINGS Sales revenue at MAN Commercial Vehicles rose by 10.8% year-on-year in 2017 to 11.1 billion. Operating profit (previous year s figure excludes special items) improved to 362 (230) million due to volume and margin effects. The initiated future program had a further positive effect. The operating return on sales (previous year s figure excludes special items) was 3.3 (2.3)%. Sales revenue in the power engineering segment fell to 3.3 (3.6) billion. In operating profit (previous year s figure excludes special items), which amounted to 193 (194) million, negative volume effects were offset by improvements in the mix. The operating return on sales (previous year s figure excludes special items) increased to 5.9 (5.4)%. 116 thousand Vehicles produced in 2017

47 Divisions MAN 43 PRODUCTION MAN Units % Trucks 100,780 91,902 Buses 10,890 10,225 Light Commercial Vehicles 3, , ,127 Commercial Vehicles Orders received (thousand units) Deliveries Vehicle sales Production Sales revenue ( million) 11,087 10, Operating result as % of sales revenue Power Engineering Sales revenue ( million) 3,283 3, Operating result as % of sales revenue In the previous year before special items. Lion s Coach DELIVERIES BY MARKET Europe/Other markets North America South America Asia-Pacific 71.7 % 1.9 % 20.5 % 5.8 % i FURTHER INFORMATION

48 44 Volkswagen Group China Divisions Volkswagen Group China Volkswagen systematically pushed ahead with its strategic realignment in China in 2017 and launched its SUV initiative. A new joint venture for e-mobility was initiated together with the manufacturer JAC. BUSINESS DEVELOPMENT The Volkswagen Group is shaping the path to tomorrow s world of mobility in China, a key sales market: in presenting the concept vehicles Audi e-tron Sportback, ŠKODA VISION E and Volkswagen I.D. CROZZ at the Shanghai Auto Show, we underscored our ambitious goals for e-mobility and pushed ahead with our strategic realignment. The e-mobility strategy tailored to the Chinese market plans to gradually introduce approximately 40 new, locally produced plug-in hybrids and electric vehicles through our joint ventures in addition to existing and new import models. Our fully automated concept car, the Sedric, presented in China in the reporting year, gives an insight into the mobility of the future, which is also a focus area at the Future Center Asia. The Volkswagen Group also launched its SUV initiative in the 2017 fiscal year and introduced exciting models to the market: the Teramont, Tiguan L, ŠKODA Kodiaq and Audi Q7 e-tron. Volkswagen agreed on a new joint venture for e-mobility in China with the Chinese car manufacturer Anhui Jianghuai Automobile (JAC) in The two partners each have a 50% interest in the new company, which plans to develop, produce and sell electric vehicles. The agreement includes the construction of a further factory and a research and development center for this purpose. The partnership also comprises the development and production of components for New Energy Vehicles (NEV) as well as the enhancement of vehicle connectivity and automotive services. In future, we plan to export vehicles produced in China with our joint venture companies SAIC VOLKS- WAGEN and FAW-Volkswagen. Under the agreement concluded, models that have already proven their popularity and quality in China will also be offered in other markets. This will supplement our model range, initially for customers in the Philippines and later in other countries of Southeast Asia. We currently manufacture vehicles and components at 20 sites in China. Together with our joint venture partner, FAW, we are starting the production of environmentally friendly models at two new vehicle plants in Qingdao and Tianjin on the east coast of China in On the Chinese market, the Volkswagen Group offers more than 170 imported and locally produced models from the Volkswagen Passenger Cars, Audi, ŠKODA, Porsche, Bentley, Lamborghini, Volkswagen Commercial Vehicles, MAN, Scania and Ducati brands. We delivered 4.2 (4.0) million vehicles (including imports) to Chinese customers in the reporting period. The Tiguan, Teramont, Magotan, New Bora, Audi A4 L, Audi Q7, ŠKODA Kodiaq and Superb models as well as Porsche Cayenne and Panamera saw a particularly strong increase in demand compared with the previous year. 4.2 million Vehicles delivered in 2017

49 Divisions Volkswagen Group China 45 EARNINGS Thousand units % million Deliveries 4,184 3, Vehicle sales 1 4,020 3, Production 4,041 3, Operating profit (100%) 11,191 11,094 Operating profit (proportionate) 4,746 4,956 1 Produced locally. Our two joint ventures SAIC VOLKSWAGEN and FAW-Volkswagen produced a total of 4.0 million vehicles in fiscal year This was 3.7% more than in the previous year. The joint ventures produce both established Group models and those specially modified for Chinese customers (e.g. with lengthened wheelbases), as well as vehicles developed exclusively for the Chinese market (such as the Volkswagen Lamando, Lavida, New Bora, New Jetta, New Santana and Teramont). Among other vehicles, the ŠKODA Kodiaq, Octavia Combi and Karoq and the upgraded Golf and Audi A3 entered production in the reporting year. The proportionate operating profit of the joint ventures in 2017 was 4.7 billion. The negative impact of more intense competition and adverse exchange rate effects was offset by the improvements in the mix, higher volumes and product cost optimization. The figures of the Chinese joint venture companies are not included in the operating profit of the Group as they are accounted for using the equity method. Their profits are included solely in the Group s financial result on a proportionate basis. Audi Q3 LOCAL PRODUCTION Units Volkswagen Passenger Cars 3,156,352 3,012,664 Audi 552, ,777 ŠKODA 332, ,858 4,041,264 3,896,299

50 46 Volkswagen Financial Services Divisions Volkswagen s financial services were in global demand again in 2017 and made a major contribution to the Group s good results. Euro-denominated corporate bonds were again issued in the primary market during the reporting period. STRUCTURE OF VOLKSWAGEN FINANCIAL SERVICES Volkswagen Financial Services comprises dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services in 51 countries. Volkswagen Financial Services AG is responsible for global coordination of the Group s financial services activities, the only exceptions being the financial services business of the Scania brand and of Porsche Holding Salzburg. In Europe, the principal companies are Volkswagen Bank GmbH, Volkswagen Leasing GmbH and Volkswagen Versicherungsdienst GmbH. VW CREDIT, INC. operates financial services activities in North America. Volkswagen Financial Services initiated a corporate restructuring in 2016, with the aim of combining the credit and deposit business within the European Economic Area (EEA) in Volkswagen Bank GmbH. Effective September 1, 2017, 100% of the shares in Volkswagen Bank GmbH were therefore transferred from Volkswagen Financial Services AG to Volkswagen AG. BUSINESS DEVELOPMENT Volkswagen Financial Services impressed customers again in the 2017 fiscal year with diverse products, attractive terms and an exceptional range of services. This led it to achieve a record result. The used-vehicle market is a strategic focus for Volkswagen Financial Services, and 2017 saw the launch of the new online used-vehicle platform HeyCar. Mobility Trader GmbH, a wholly owned subsidiary of Volkswagen Financial Services AG established for this purpose, is a quality portal for all automotive brands, not only those belonging to the Volkswagen Group. HeyCar puts vehicles and quality at its heart. The platform also enables dealers to tap potential earnings from additional sales. HeyCar is completely free of advertising and purchased listings. Volkswagen Financial Services is driving the further digitalization of its business and will perform all payment service activities for the Volkswagen Group in the future. To establish, expand and operate these services (payment for parking tickets, car sharing, electric charging, fuel and road tolls) around the world, Volkswagen Financial Services has founded a new, independent company in Luxembourg. In addition, Volkswagen Financial Services has acquired the Munich-based start-up ContoWorks GmbH, which provides an integrated platform for payment services. 2.5 billion Operating profit in 2017

51 Divisions Volkswagen Financial Services 47 The main refinancing sources for Volkswagen Financial Services are money and capital market instruments, asset-backed securities (ABS) transactions and customer deposits from the direct banking business. In the reporting period, Volkswagen Leasing GmbH successfully returned to the primary market for eurodenominated corporate bonds. On the capital market, it placed two floating-rate bonds with terms of two and four years, as well as a fixed-rate bond with a term of seven and a half years. The total volume was 3.5 billion, making this the largest transaction by Volkswagen Financial Services to date. In addition, two bonds with a total volume of 2.25 billion were placed over the remainder of the year. Volkswagen Bank GmbH conducted its third euro benchmark issue with three bonds and a total volume of 2.0 billion. Numerous transactions were also successfully placed internationally. The second bond issued by Volkswagen Finance (China) Co., Ltd. in China has an issue volume of CNY 4 billion (approximately 534 million). In Brazil, the local company Banco Volkswagen S.A. issued a bond with a volume of BRL 500 million, which translates to approximately 134 million. Volkswagen Financial Services Australia Pty Limited placed a bond with a volume of AUD 500 million ( 339 million) and two bonds with a total volume of AUD 325 million (approximately 217 million). In the United Kingdom, bonds for GBP 850 million (approximately 1 billion) and GBP 300 million (approximately 340 million) were issued by Volkswagen Financial Services N.V. Other bonds were placed in Sweden, Norway, India, Mexico and Turkey. Volkswagen Financial Services AG successfully issued a borrower s note loan in 2017 with a total volume of approximately 900 million, of which more than 500 million was in US dollars and the remainder in euros. The terms were three, five and seven years. Volkswagen Leasing GmbH was active on the market again in fiscal year 2017 with its asset-backed securities (ABS) transactions. German leasing receivables with a volume of approximately 1.6 billion were securitized in the Volkswagen Car Lease 25 program. Outside Germany, Volkswagen Financial Services issued various ABS transactions on the market, including in Australia, the United Kingdom, France and China. A total of eight bonds were placed. Other instruments used as part of the diversified funding strategy are customer deposits, commercial paper and credit lines. Hey Car

52 48 Volkswagen Financial Services Divisions Starting January 1, 2017, Porsche s financial services business is reported as part of Volkswagen Financial Services. At 6.8 million contracts, the number of new financing, leasing, service and insurance contracts signed in the reporting period was 3.4% higher than in the previous year. The total number of contracts as of December 31, 2017 stood at a new record high of 17.2 million (+6.8%). The customer financing/leasing area accounted for 9.6 million contracts, up 7.6% year-on-year. In the Service/Insurance area, the number of contracts increased by 5.9% to 7.6 million. With credit eligibility criteria remaining unchanged, the penetration rate, expressed as the ratio of financed or leased vehicles to relevant Group delivery volumes including the Chinese joint ventures was steady at 33.1 (33.1)%. At the end of the reporting period, Volkswagen Bank managed 1.5 (1.6) million deposit accounts. Volkswagen Financial Services employed 13,955 people worldwide as of December 31, 2017, 6,809 of them in Germany. SALES REVENUE AND EARNINGS In the 2017 fiscal year, Volkswagen Financial Services generated sales revenue 31.8 billion, 15.5% more than in the previous year. At 2.5 billion, operating profit exceeded the previous year s figure by 16.9%, hitting a new record. In addition to Porsche Financial Services, the increase resulted, above all, from improved margins and business growth. VOLKSWAGEN FINANCIAL SERVICES % Number of contracts thousands 17,234 16, Customer financing 1 5,672 5, Leasing 1 3,921 3, Service/Insurance 7,641 7, Lease assets million 36,422 31, Receivables from million Customer financing 1 58,125 55, Dealer financing 19,614 17, Leasing agreements 1 39,553 34, Direct banking deposits million 30,408 32, Total assets million 186, , Equity million 25,634 21, Liabilities 2 million 154, , Equity ratio % Return on equity before tax 3 % Leverage Operating result million 2,460 2, Earnings before tax million 2,299 2, Employees at Dec ,955 13, Prior year adjusted, as some of the receivables from customers are now presented as lease receivables. 2 Excluding provisions and deferred tax liabilities. 3 Earnings before tax as a percentage of average equity (continuing operations). 4 Liabilities as a percentage of equity. ADDITIONAL INFORMATION

53 GROUP MANAGEMENT REPORT 3 Group Management Report (Combined Management Report of the Volkswagen Group and Volkswagen AG)

54 GROUP MANAGEMENT REPORT 51 Goals and Strategies 54 Internal Management System and Key Performance Indicators 56 Structure and Business Activities 59 Corporate Governance Report 67 Remuneration Report 84 Executive Bodies 88 Disclosures Required Under Takeover Law 91 Diesel Issue 95 Business Development 108 Shares and Bonds 114 Results of Operations, Financial Position and Net Assets 130 Volkswagen AG (condensed, in accordance with the German Commercial Code) 134 Sustainable Value Enhancement 157 Report on Expected Developments 164 Report on Risks and Opportunities 190 Prospects for 2018

55 Group Management Report Goals and Strategies 51 Goals and Strategies We are striving for lasting success in tomorrow s world of mobility and intend to be one of the world s leading providers of sustainable mobility. This is the reason we have anchored the future program TOGETHER Strategy 2025 in the Group. The future program TOGETHER Strategy 2025, the biggest change process in the history of Volkswagen, was launched in With the future program, we are making the Volks- FUTURE PROGRAM TOGETHER STRATEGY 2025 Excellent employer Excited customers Sustainable growth Role model for environment, safety and integrity Competitive profitability wagen Group more focused, efficient, innovative, customeroriented and sustainable, and more systematically geared to generating profitable growth. The program creates the framework and lays the cornerstones for us to achieve our vision of being one of the world s leading providers of sustainable mobility. The time horizon until 2025 shows that our thoughts and actions are long-term and future-oriented. The term TOGETHER describes the mindset that will be even more vital to the Volkswagen Group s long-term success going forward. Our intention with the new Group strategy is for everyone in the Volkswagen Group to join us in producing exciting vehicles and forward-looking, tailor-made mobility solutions that will continue to inspire our customers, meeting their diverse needs with a portfolio of strong brands. Every day, we actively assume and exercise responsibility in relation to the environment, society and safety, and we wish to be a role model in these areas. Integrity, reliability, quality and passion thus form the basis for our work. In this way, we will aim for technological leadership in the industry, ensure our competitive profitability and remain an excellent, reliable and secure employer at the same time. The Code of Collaboration formulated as part of the future program is the foundation on which the Group strategy rests. This Code describes how collaboration is to take place within the Group and between individuals in their day-to-day work. Its core values are encapsulated in the terms genuine, straightforward, open-minded, as equals and united.

56 52 Goals and Strategies Group Management Report FOUR BUILDING BLOCKS OF THE FUTURE PROGRAM TOGETHER STRATEGY 2025 Our Group strategy comprises a raft of far-reaching strategic decisions and specific initiatives essentially aimed at safeguarding the Group s long-term future and generating profitable growth. It is composed of four building blocks which cover a total of 16 strategic Group initiatives. The first of these is the transformation of the core automotive business. Developing, building and selling vehicles will remain essential for the Volkswagen Group going forward. However, there will be far-reaching and lasting changes to this business in the future. That is the reason why we are comprehensively restructuring our core business to face this new era of mobility. The second key building block in our Group strategy is establishing a new mobility solutions business. In this business, we are developing innovative and efficient, attractive yet profitable mobility services that are tailored to customer requirements with the goal of being one of the leading providers in this growth market in the future. With the third key building block, we are intensifying our traditionally excellent innovative strength and placing it on an even broader footing. This is necessary both for the transformation of our core business and for the establishment of the new mobility solutions business. To this end, we are pushing ahead with the digital transformation in all parts of the Company. Becoming one of the world s leading providers of sustainable mobility calls for substantial capital expenditure. This will be financed in particular through efficiency gains along the entire value chain from product development and procurement through to production and distribution as well as in the central supporting areas. Additional funds for future investments can also be generated by optimizing the existing portfolio of brands and equity investments. Through the fourth key building block of the Group strategy we will safeguard the financing of the Volkswagen Group and place it on a solid basis. GOALS AND KEY PERFORMANCE INDICATORS OF THE GROUP S STRATEGY The strategic initiatives describe how we intend to achieve our vision of being one of the world s leading providers of sustainable mobility. For this purpose, we have defined four target dimensions excited customers, excellent employer, role model for the environment, safety and integrity, and competitive profitability which are designed to help us grow sustainably. Although these target dimensions apply throughout the Group, the strategic KPIs that we will use in the future to measure how well we have implemented our Group strategy, depend on the business model. After all, the business model for our passenger car-producing brands is different from that for trucks and buses and also from that of our Power Engineering Business Area and our services business. BUILDING BLOCKS AND STRATEGIC GROUP INITIATIVES TRANSFORM CORE BUSINESS Sharpen positioning of brands Develop successful vehicle and drivetrain portfolio Partner with regional players to win in economy segment Streamline modular toolkits Implement model line organization Realign Components business Develop battery technology as new core competency Develop self-driving system for autonomous vehicles and artificial intelligence Develop best-in-class user experience across brands and customer touchpoints BUILD MOBILITY SOLUTIONS BUSINESS Establish mobility solutions business Develop and expand attractive and profitable smart mobility offering SECURE FUNDING Improve operational excellence Optimize business portfolio Integrate strategy and planning process STRENGTHEN INNOVATION POWER Drive digital transformation Create organization 4.0

57 Group Management Report Goals and Strategies 53 In the following, we describe the Group s strategic goals attached to these target dimensions. The strategic KPIs of the competitive profitability target dimension have been defined and anchored uniformly in the Group. As the new Group strategy has yet to be specified in detail, the content of some strategic KPIs in the other target dimensions is still being determined. We report on the already defined nonfinancial strategic KPIs in the Corporate Governance Report and Sustainable Value Enhancement sections. Target dimension: excited customers This target dimension focuses on the diverse needs of our customers and on tailor-made mobility solutions. We aspire to exceed our customers expectations, generating maximum benefit for them. That calls not only for the best products, the most efficient solutions and the best service, but also for flawless quality and an outstanding image. We want to excite our existing customers, win over new ones and retain their loyalty in the long term because only loyal and faithful customers will recommend us to others. The strategic KPIs consist of the net promoter score, the conquest rate and KPIs pertaining to loyalty, customer satisfaction and quality. Target dimension: excellent employer Skilled and dedicated employees are one of the keys to sustainable success. We wish to promote their satisfaction and motivation by means of equal opportunities, an attractive and modern working environment, and a forward-looking organization of work. Exemplary leadership and corporate culture forms the foundation for this, enabling us to retain our core workforce and attract new talent. The strategic KPIs of this target dimension cover internal employer attractiveness determined by means of the opinion survey, external employer attractiveness, an external employer ranking as well as a KPI pertaining to cross-brand exchange and rotation and the diversity index. Target dimension: role model for the environment, safety and integrity Every day, we at the Volkswagen Group assume and exercise responsibility in relation to the environment, safety and society. This is reflected in our thoughts and actions and in all our decisions in equal measure. We pay particular attention to the use of resources and the emissions of our product portfolio as well as those of our sites and plants, with the goal of continuously improving our carbon footprint and lowering pollutant emissions. Through our innovations and outstanding quality, we aim for maximum product safety. The most important principles in this process include compliance with laws and regulations, the establishment of secure processes, and dealing openly with mistakes so that they can be avoided or rectified in the future. In terms of integrity, Volkswagen aims to become a role model for a modern, transparent and successful enterprise. The strategic KPIs of this target dimension include the decarbonization index and KPIs pertaining to emissions figures, compliance, process reliability and a culture of dealing openly with mistakes. Target dimension: competitive profitability Investors judge us by whether we are able to meet our obligations as regards interest payments and debt repayments. As equity holders, they expect appropriate dividends and a long-term increase in the value of their shares. We make investments with a view to achieving profitable growth and strengthening our competitiveness, thus keeping the Volkswagen Group on a firm footing and ensuring it remains an attractive investment option. The goals we have set ourselves are operational excellence in all business processes and becoming the benchmark for the entire industry. The strategic KPIs are operationalized for internal management purposes: target and actual data are derived from Volkswagen Group figures. STRATEGIC KPIS: COMPETITIVE PROFITABILITY Operating return on sales 1 6.0% 7 to 8% Research and development ratio (R&D ratio) in the Automotive Division 7.4% ~6% Capex/sales revenue in the Automotive Division 6.9% ~6% Net cash flow in the Automotive Division Net liquidity in the Automotive Division 8,887 million 24,522 million, 11.5% Positive, to allow a distribution ratio of 30% ~10% of consolidated sales revenue Return on investment (ROI) in the Automotive Division 0.2% >15% before special items

58 54 Internal Management System and Key Performance Indicators Group Management Report Internal Management System and Key Performance Indicators This chapter describes, on the basis of the Group strategy, how the Volkswagen Group is managed and the key performance indicators used for this purpose. In addition to financial measures, our management system also contains nonfinancial key performance indicators. The Volkswagen Group s performance and success can be measured by both financial and nonfinancial key performance indicators. With the operational excellence Group initiative, we aim to improve these indicators throughout all areas and along the entire value chain. In the following, we first describe the internal management process and then explain the Volkswagen Group s core performance indicators. INTERNAL MANAGEMENT PROCESS IN THE VOLKSWAGEN GROUP The Integrate strategy and planning process Group initiative is focused on continuity and even closer dovetailing of the Group and brand strategies with the operational planning process. This enhances transparency when it comes to the financial assessment and the evaluation of directional decisions. The operational planning that is conducted once a year and generally covers a period of five years is incorporated into the strategic planning as a key management element of the Group. Medium-term planning forms the core of our operational planning and is used to formulate and safeguard the requirements for realizing strategic projects designed to meet Group targets in both technical and economic terms and particularly in relation to earnings, cash flow and liquidity effects. In addition, it is used to coordinate all business areas with respect to the strategic action areas concerned: functions/ processes, products and markets. When planning the Company s future, the individual planning components are determined on the basis of the timescale involved: > the long-term unit sales plan, which sets out market and segment growth and then derives the Volkswagen Group s delivery volumes from them, > the product program as the strategic, long-term factor determining corporate policy, > capacity and utilization planning for the individual sites. The coordinated results of the upstream planning processes are used as the basis for the medium-term financial planning: the Group s financial planning, including the brands and business fields, comprises the income statement, cash flow and balance sheet planning, profitability and liquidity, as well as the upfront investments needed for alternative products and the implementation of strategic options. The first year of the medium-term planning period is fixed and a budget drawn up for the individual months. This is planned in detail down to the level of the operating cost centers. The budget is reviewed each month throughout the year to establish the degree to which the targets have been met. Key internal management instruments comprise target/ actual comparisons, prior-year comparisons, variance analyses and, where necessary, action plans to ensure targets are met. For the current fiscal year, detailed revolving monthly forecasts are prepared for the coming three months and the full year, taking into account the current risks and opportunities. The focus of intrayear internal management is therefore on adapting ongoing operations. At the same time, the current forecast serves as a potential, ongoing corrective to the medium-term and budget planning that follows on from it.

59 Group Management Report Internal Management System and Key Performance Indicators 55 CORE PERFORMANCE INDICATORS IN THE VOLKSWAGEN GROUP The Volkswagen Group s internal management system is based on nine core performance indicators, which are derived from our strategic goals. Two of these indicators were added in fiscal year 2017 under the future program TOGETHER Strategy 2025: > Deliveries to customers > Sales revenue > Operating result > Operating return on sales > Research and development ratio (R&D ratio) in the Automotive Division (from 2017) > Capex/sales revenue in the Automotive Division > Net cash flow in the Automotive Division > Net liquidity in the Automotive Division (from 2017) > Return on investment (ROI) in the Automotive Division Deliveries to customers are defined as handovers of new vehicles to the end customer. This figure shows the popularity of our products and is the measure we use to determine our competitive position in various markets. Deliveries are closely related to our targets of exciting our customers, being a role model in terms of the environment, safety and integrity, and being an excellent employer. One of the most important prerequisites for the Company s long-term success is a strong brand portfolio that on the basis of outstanding quality offers tailor-made mobility solutions with safe, resource-efficient vehicles, thus meeting the diverse needs of customers. Demand for our products guarantees not only unit sales and production, but also full utilization of our sites and the jobs of our employees. The goals we are striving for cannot be achieved without a skilled, dedicated workforce and a consensus on shared values. Sales revenue, which does not include the figures for our equity-accounted Chinese joint ventures, reflects our market success in financial terms. Following adjustment for our use of resources, the operating result reflects the Company s actual business activity and documents the economic success of our core business. The operating return on sales is the ratio of the operating result to sales revenue. The research and development ratio (R&D ratio) in the Automotive Division shows total research and development costs in relation to sales revenue. Research and development costs comprise a range of expenses, from futurology through to the development of marketable products. Particular emphasis is placed on the environmentally friendly orientation of our product portfolio. The R&D ratio underscores the efforts made to ensure the Company s future viability: the goal of competitive profitability geared to sustainable growth. The ratio of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs) to sales revenue in the Automotive Division reflects both our innovative power and our future competitiveness. It shows our capital expenditure largely for modernizing and expanding our product range and for environmentally friendly drivetrains, as well as for adjusting the production capacity and improving production processes in relation to the Automotive Division s sales revenue. Net cash flow in the Automotive Division represents the excess funds from operating activities available for dividend payments, for example. It is calculated as cash flows from operating activities less cash flows from investing activities attributable to operating activities. Net liquidity in the Automotive Division is the total of cash, cash equivalents, securities, loans and time deposits not financed by third-party borrowings. To safeguard our business activities, we have formulated the strategic target that net liquidity in the Automotive Division should amount to approximately 10% of the consolidated sales revenue. We use the return on investment (ROI) to calculate the return on invested capital for a particular period in the Automotive Division, including the Chinese joint ventures on a proportionate basis, by calculating the ratio of the operating result after tax to average invested capital. If the return on investment (ROI) exceeds the market cost of capital, the value of the Company has increased. This is how we measure the financial success of our brands, locations and vehicle projects. You can find information on and explanations of the sales figures and the Volkswagen Group s financial key performance indicators on pages 101 to 107 and on pages 114 to 129, respectively. Detailed descriptions of our activities and additional nonfinancial key performance indicators in the areas of sustainability, research and development, procurement, production, sales and marketing, quality assurance, employees, information technology and the environment can be found in the chapter entitled Sustainable Value Enhancement beginning on page 134 of this annual report. Nonfinancial key performance indicators related to compliance are described in the Corporate Governance Report on page 65.

60 56 Structure and Business Activities Group Management Report Structure and Business Activities This chapter describes the legal and organizational structure of the Volkswagen Group and explains the material changes in 2017 with respect to equity investments. OUTLINE OF THE LEGAL STRUCTURE OF THE GROUP Volkswagen AG is the parent company of the Volkswagen Group. It develops vehicles and components for the Group s brands, but also produces and sells vehicles, in particular passenger cars and light commercial vehicles for the Volkswagen Passenger Cars and Volkswagen Commercial Vehicles brands. In its capacity as parent company, Volkswagen AG holds indirect or direct interests in AUDI AG, SEAT S.A., ŠKODA AUTO a.s., Dr. Ing. h.c. F. Porsche AG, Scania AB, MAN SE, Volkswagen Financial Services AG, Volkswagen Bank GmbH and a large number of other companies in Germany and abroad. More detailed disclosures are contained in the list of shareholdings in accordance with sections 285 and 313 of the Handelsgesetzbuch (HGB German Commercial Code), which can be accessed at and is part of the annual financial statements. Volkswagen AG is a vertically integrated energy supply company as defined by section 3 no. 38 of the Energiewirtschaftsgesetz (EnWG German Energy Industry Act) and is therefore subject to the provisions of the EnWG. In the electricity sector, Volkswagen AG generates, sells and distributes electricity together with a Group subsidiary. Volkswagen AG s Board of Management is the ultimate body responsible for managing the Group. The Supervisory Board appoints, monitors and advises the Board of Management; it is consulted directly on decisions that are of fundamental significance for the Company. ORGANIZATIONAL STRUCTURE OF THE GROUP The Volkswagen Group is one of the leading multibrand groups in the automotive industry. The Company s business activities comprise the Automotive and Financial Services divisions. All brands within the Automotive Division with the exception of the Volkswagen Passenger Cars and Volkswagen Commercial Vehicles brands are independent legal entities. The Automotive Division comprises the Passenger Cars, Commercial Vehicles and Power Engineering business areas. The Passenger Cars Business Area essentially consolidates the Volkswagen Group s passenger car brands. Activities focus on the development of vehicles and engines, the production and sale of passenger cars, and the genuine parts business. The product portfolio ranges from fuel-efficient compact cars to luxury vehicles and also includes motorcycles, and will gradually be supplemented by mobility solutions. The Commercial Vehicles Business Area primarily comprises the development, production and sale of light commercial vehicles, trucks and buses from the Volkswagen Commercial Vehicles, Scania and MAN brands, the corresponding genuine parts business and related services. The collaboration between the MAN and Scania commercial vehicle brands is managed and coordinated under the umbrella of Volkswagen Truck & Bus GmbH. The commercial vehicles portfolio ranges from pickups to heavy trucks and buses. The Power Engineering Business Area combines the largebore diesel engines, turbomachinery, special gear units, propulsion components and testing systems businesses. The activities of the Financial Services Division comprise dealer and customer financing, vehicle leasing, banking and insurance activities, as well as fleet management and mobility offerings. With its brands, the Volkswagen Group is present in all relevant markets around the world. The Group s key sales markets currently include Western Europe, China, the USA, Brazil and Mexico. Volkswagen AG and the Volkswagen Group are managed by the Volkswagen AG s Board of Management in accordance with the Volkswagen AG Articles of Association and the rules of procedure for Volkswagen AG s Board of Management issued by the Supervisory Board.

61 Group Management Report Structure and Business Activities 57 Each brand in the Volkswagen Group is managed by a board of management, which ensures its independent and selfcontained development and business operations. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with to the extent permitted by law. This allows Group-wide interests to be pursued, while at the same time safeguarding and reinforcing each brand s specific characteristics. Matters that are of importance to the Group as a whole are submitted to the Group Board of Management in order to reach agreement between the parties involved, to the extent permitted by law. The rights and obligations of the statutory bodies of the relevant brand company remain unaffected. The companies of the Volkswagen Group are managed separately by their respective managements. In addition to the interests of their own companies, the management of each individual company takes into account the interests of the Group and of the individual brands in accordance with the framework laid down by law. At Group level, committees also address key strategic issues, for example relating to product planning, investments and management issues. To continue to enhance the Group s leadership and management model, we redesigned the portfolio of these committees and the regulation landscape at Group level in the reporting period. Among other things, a Committee for Digital Transformation was created and the Committee for Liquidity and Foreign Currency was replaced by the Group Board of Management Committee for Risk Management. These changes have reduced complexity and reinforced governance within the Group. In addition, the Group functions have continued to focus on leveraging substantial synergies across all brands and business fields, pooling competencies and making these available to the brands. Operational fine-tuning at Group level has also been reduced further and, at the same time, greater entrepreneurial responsibility assigned to the brands and regions, making the Group more agile and speeding up decisionmaking processes. The Group Board of Management can concentrate more on strategy and the management of major areas in which synergies can be created, for example joint creation of a digitalization architecture, brand positioning, product strategy, development and use of platforms and modules, procurement and plant capacity utilization. With our future program TOGETHER Strategy 2025, the Organization 4.0 Group initiative also supports the Company s transformation and is making the Group s organization fit for the future. The aim of this initiative is to connect activities across divisions, initiate new organizational approaches and anchor these in the Group for the long term. This will not only enable but will actively create holistic stimulus for innovations, entrepreneurship and change, ensuring that the Group remains agile and competitive in future. MATERIAL CHANGES IN EQUITY INVESTMENTS The control and profit and loss transfer agreement between MAN SE, as the controlled company, and Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volkswagen AG, as the controlling company, came into force upon its entry in the commercial register on July 16, The conclusion of the control and profit and loss transfer agreement replaced the group based on the de facto exercise of management control by a contractual group, permitting considerably more efficient and less bureaucratic cooperation between the MAN Group and the rest of the Volkswagen Group. Noncontrolling interest shareholders of MAN SE have the right to tender MAN ordinary and preferred shares in Volkswagen Truck & Bus GmbH during and two months after the conclusion of the award proceedings instituted in July 2013 to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. The Munich Regional Court ruled in the first instance at the end of July 2015 that the settlement payable to the shareholders should be increased from to per share. Both Volkswagen Truck & Bus GmbH and a number of the noncontrolling interest shareholders have appealed to the Higher Regional Court in Munich. At the end of December 2017, Volkswagen Truck & Bus GmbH held 75.73% of the ordinary shares and 46.95% of the preferred shares of MAN SE. At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volkswagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The transaction was closed on February 28, Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar through a capital increase. The interest held was increased to 16.9% by the end of Navistar is a holding company whose subsidiaries produce trucks, coaches, commercial and school buses, diesel engines and service parts. The alliance includes framework agreements for a strategic technology and supply cooperation and for the joint venture Global Truck & Bus Procurement LLC, based in Lisle (Illinois), which will pursue joint global procurement opportunities. The partnership will focus on developing common powertrain systems, but may

62 58 Structure and Business Activities Group Management Report also entail collaboration in other areas of commercial vehicle development and procurement. Opportunities to cooperate in the fields of autonomous driving, alternative fuel technologies and connectivity will also be examined. The aim is to jointly create new synergies and to achieve greater independence from the cycles in the industry. Part of the PGA Group SAS, Paris, France, was sold by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group on June 1, The sale is in connection with the strategic development of Porsche Holding Salzburg s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. The transaction encompasses dealerships in Poland, the Netherlands, Belgium and in some cases also in France. With the Optimize business portfolio Group initiative, the Board of Management intends to ensure the Volkswagen Group s competitiveness and financial performance as a forward-looking mobility provider by focusing on its core business and using its capital to the best advantage. To this end, we are continuously monitoring and analyzing our portfolio and can respond in a timely manner by making any necessary purchases or sales. LEGAL FACTORS INFLUENCING BUSINESS Like other international companies, Volkswagen companies are affected by numerous laws in Germany and abroad. In particular, there are legal requirements relating to development, products, production and distribution, as well as, among other things, to supervisory, data protection, financial, company, commercial, capital market, anti-trust and tax regulations and regulations relating to labor, banking, state aid, energy, environmental and insurance law. VOLKSWAGEN AG SHAREHOLDINGS

63 Group Management Report Corporate Governance Report 59 Corporate Governance Report Corporate governance is defined as responsible, transparent corporate management and supervision that aims to add long-term value. For us, good corporate governance not only forms the basis for lasting success; it is also an important prerequisite for strengthening the trust of our stakeholders in our work. THE GERMAN CORPORATE GOVERNANCE CODE A BLUEPRINT FOR SUCCESSFUL CORPORATE GOVERNANCE Corporate governance provides the regulatory framework for corporate management and supervision. This includes a company s organization and values, and the principles and guidelines for its business policy. The German Corporate Governance Code (the Code) contains recommendations and suggestions for sound, responsible corporate management and supervision. It was prepared by a dedicated government commission on the basis of the material provisions and nationally and internationally accepted standards of corporate governance. The government commission regularly reviews the Code in light of current developments and updates it as necessary. The Board of Management and the Supervisory Board of Volkswagen AG base their work on the recommendations and suggestions of the German Corporate Governance Code. We consider good corporate governance to be a key prerequisite for achieving a lasting increase in the Company s value. It helps strengthen the trust of our shareholders, customers, employees, business partners and investors in our work and meet the steadily increasing demand for information from national and international stakeholders. DECLARATIONS OF CONFORMITY (VALID AS OF THE DATE OF THE RELEVANT DECLARATION) On November 17, 2017, the Board of Management and the Supervisory Board of Volkswagen AG issued the annual declaration of conformity with the Code as required by section 161 of the Aktiengesetz (AktG German Stock Corporation Act) with the following wording: The Board of Management and the Supervisory Board declare the following: 1. The recommendations of the Government Commission of the German Corporate Governance Code in the version dated 5 May 2015 (the Code) that were published by the German Ministry of Justice in the official section of the Federal Gazette (Bundesanzeiger) on 12 June 2015 were complied with in the period from the last Declaration of Conformity dated 18 November 2016 until the amended version of the Code dated 7 February 2017 came into effect on 24 April 2017, with the exception of the following numbers listed below with their stated reasons. > a) 4.2.3(4) (severance cap) A severance cap will be included in new contracts concluded with members of the Board of Management, but not in contracts concluded with Board of Management members entering their third term of office or beyond, provided a cap did not form part of the initial contract. Grandfather rights have been applied accordingly. > b) sentence 3 (independence of the chair of the Audit Committee) It is unclear from the wording of this recommendation whether the Chairman of the Audit Committee is "independent" within the meaning of number sentence 3 of the Code. Such independence could be considered lacking in view of his seat on the Supervisory Board of Porsche Automobil Holding SE, kinship with other members of the Supervisory Board of the company and of Porsche Automobil Holding SE, his indirect minority interest in Porsche Automobil Holding SE, and business relations with other members of the Porsche and Piëch families who also have an indirect interest in Porsche Automobil Holding SE. However, in the opinion of the Supervisory Board and the Board of Management, these relationships do not constitute a conflict of interest nor do they interfere with his duties as the Chairman of the Audit Committee. This exception is therefore being declared purely as a precautionary measure. > c) 5.4.1(5 to 7) (disclosure regarding election recommendations) With regard to recommendation number 5.4.1(5) to (7) of the Code stating that certain circumstances must be disclosed by the Supervisory Board when making election recommendations to the Annual General Meeting, the stipulations of the Code are vague and the definitions

64 60 Corporate Governance Report Group Management Report unclear. Purely as a precautionary measure, the Board of Management and the Supervisory Board therefore declare a deviation from the Code in this respect. Notwithstanding this, the Supervisory Board will make every effort to satisfy the requirements of the recommendation. > d) 5.4.6(2) sentence 2 (performance-related remuneration of members of the Supervisory Board) Until the amendment to article 17(1) of the Articles of Association adopted by the Annual General Meeting on 10 May 2017 that came into effect on 1 June 2017, Supervisory Board remuneration was linked in part to the dividends. We therefore assumed that we had complied with the Code and that the variable compensation component was oriented toward the sustainable growth of the company as defined in number 5.4.6(2) sentence 2 of the Code. However, as it could not be ruled out that other views would be taken in this respect, a deviation from this recommendation in the Code is being declared as a precautionary measure. 2. The recommendations of the Government Commission of the German Corporate Governance Code in the version dated 7 February 2017 (the 2017 Code) that were published by the German Ministry of Justice on 24 April 2017 in the official section of the Federal Gazette (Bundesanzeiger) were complied with in the period from when this version came into effect on 24 April 2017 and will continue to be complied with, with the exception of the numbers listed below and their stated reasons. > a) 4.2.3(4) (severance cap) > b) 5.3.2(3) sentence 2 (independence of the chair of the Audit Committee) > c) 5.4.1(6 to 8) (disclosure regarding election recommendations) The reasons for exceptions a) to c) are listed above in the details under point 1. > d) 5.4.6(2) sentence 2 (performance-related remuneration of members of the Supervisory Board) Until the amendment to article 17(1) of the Articles of Association adopted by the Annual General Meeting on 10 May 2017 that came into effect on 1 June 2017, Supervisory Board remuneration was linked in part to the dividends. We therefore assumed that we had indeed complied with the Code and that the variable compensation component was oriented toward the sustainable growth of the company as defined in number 5.4.6(2) sentence 2 of the 2017 Code. However, as it could not be ruled out that other views would be taken in this respect, a deviation from this recommendation in the Code was declared as a precautionary measure. The amendment to the Articles of Association that came into effect on 1 June 2017 introduced fixed remuneration retroactively as of 1 January 2017, so that the recommendation has definitely been complied with since 1 June > e) 4.2.3(2) sentence 3 (variable remuneration package in principle future-oriented) The recommendation that the variable remuneration components based on a multi-year assessment should essentially be forward-looking has been recently added to the Code. The corresponding remuneration components for the members of the Board of Management were in the former system essentially based on the results of the past fiscal year and would therefore not be suitable for this recommendation. In February 2017, the Supervisory Board adopted a new system for the Board of Management remuneration in which the multi-year variable remuneration components were essentially future-oriented. The new remuneration system was fully implemented with retroactive effect to 1 January. > f) 5.4.1(2) sentence 1 (objectives regarding the composition of the Supervisory Board; profile of skills and expertise) This recommendation concerning the specification of concrete objectives for the composition of the Supervisory Board was supplemented when the 2017 Code came into force to the effect that the Supervisory Board should also prepare a profile of skills and expertise for the entire committee in addition to specifying objectives for its composition. This recommendation, more specifically the supplement, has not been complied with from when the amended version of the recommendation took effect until today due to the new addition. Following consultations and specifications on the part of the Supervisory Board, this recommendation will be complied with in full as of today. > g) 5.4.1(5) sentence 2 (curriculum vitae of the members of the Supervisory Board) The recommendation to publish updated curriculum vitae of all members of the Supervisory Board on the company website every year, including an overview of the main ancillary activities, has been newly added to the 2017 Code. The curriculum vitae of members of the Supervisory Board were published on 1 August 2017; this included an overview of their main ancillary activities beyond their Supervisory Board mandates. The recommendation has been complied with since that time. The current declaration of conformity is also published on our website, With the exception of number 4.2.3(2) sentence 9 (no early disbursements of variable remuneration components) and number 5.1.2(2) sentence 1 (duration of first-time appointments to the Board of Management), the suggestions in the current version of the Code have been complied with. Provision is made to some extent for the early disbursement of multiple-year, variable remuneration components in the event that one member of the Board of Management retires (early) from the Board; independently of this, such remuneration components could be disbursed early. The Supervisory Board will decide the duration of each first-time

65 Group Management Report Corporate Governance Report 61 appointment to the Board of Management on an individual basis, taking the best interests of the Company into account. The suggestion made in number sentence 2 (accessibility of the voting proxy during the Annual General Meeting) was implemented at the 2017 Annual General Meeting in such a manner that the shareholders were able to reach the voting proxies named by the Company to exercise their voting rights until 1:00 pm, also by electronic means. The suggestion made in number (broadcast of the Annual General Meeting) was implemented at the 2017 Annual General Meeting so that the introductory remarks by the Chairman of the Supervisory Board and the speech of the Chairman of the Board of Management were broadcast. Our listed subsidiaries AUDI AG, MAN SE and Renk AG have also issued declarations of conformity with the German Corporate Governance Code. The declarations of conformity of our listed subsidiaries can be accessed at the websites shown on this page. COOPERATION BETWEEN THE BOARD OF MANAGEMENT AND THE SUPERVISORY BOARD The Supervisory Board advises and monitors the Board of Management with regard to the management of the Company and is directly involved in decisions of fundamental importance to the Company. The Board of Management and the Supervisory Board of Volkswagen AG consult closely on the strategic orientation of the Volkswagen Group. The two bodies jointly assess, at regular intervals, the progress made in implementing the corporate strategy. The Board of Management reports to the Supervisory Board regularly, promptly and comprehensively in both written and oral form on all issues of relevance for the Company with regard to strategy, planning and the situation of the Company, the development of the business, the risk situation, risk management and compliance. More information on cooperation between the Board of Management and the Supervisory Board of Volkswagen AG and on the work and structure of the committees of the Supervisory Board can be found in the Report of the Supervisory Board on pages 12 to 17 of this annual report. DECLARATION OF CONFORMITY OF VOLKSWAGEN AG DECLARATION OF CONFORMITY OF AUDI AG DECLARATION OF CONFORMITY OF MAN SE DECLARATION OF CONFORMITY OF RENK AG Information on the members of the Board of Management and Supervisory Board, as well as on the Supervisory Board committees can be found on pages 84 to 87. OBJECTIVES FOR THE COMPOSITION OF THE SUPERVISORY BOARD AND BOARD OF MANAGEMENT AS WELL AS SENIOR EXECUTIVE POSITIONS In view of the Company s specific situation, its purpose, its size and the extent of its international activities, the Supervisory Board of Volkswagen AG strives to achieve a composition that takes the Company's ownership structure and the following aspects into account: > At least three members of the Supervisory Board should be persons who embody the criterion of internationality to a particularly high degree. > At least four shareholder representative members of the Supervisory Board should be persons without potential conflicts of interest, particularly conflicts of interest that could arise from an advisory or board position at customers, suppliers, lenders, or other third parties. > In addition, at least four of the shareholder representatives must be persons who are independent as defined in number of the German Corporate Governance Code. > At least three of the seats on the Supervisory Board should be held by people who make a special contribution to the diversity of the Board. > Furthermore, proposals for elections should not normally include persons who will have reached the age of 75 on the date of the election or who will have been members of the Supervisory Board for more than 15 years on the date of the election. The above criteria have been met. In addition, the Supervisory Board has decided on the following profile of skills and expertise for the full Board: The Supervisory Board as a whole must collectively have the knowledge, skills, and professional expertise required to properly perform its supervisory function and assess and monitor the business that the Company conducts. For this, the members of the Supervisory Board must collectively be familiar with the sector in which the Company operates. The key skills and requirements of the Supervisory Board as a whole include, in particular: > Knowledge of or experience in the manufacture and sale of all types of vehicles and engines or other technical products, > Knowledge of the automotive industry, the business model and the market, as well as product expertise, > Knowledge in the field of research and development, particularly of technologies with relevance for the Company, > Experience in corporate leadership positions or in the supervisory bodies of large companies, > Knowledge in the areas of governance, law or compliance,

66 62 Corporate Governance Report Group Management Report > Detailed knowledge in the areas of finance, accounting, or auditing, > Knowledge of the capital markets, > Knowledge in the areas of controlling/risk management and the internal control system, > Human resources expertise (particularly the search for and selection of members of the Board of Management, and the succession process) and knowledge of incentive and remuneration systems for the Board of Management, > Detailed knowledge or experience in the areas of codetermination, employee matters and the working environment in the Company. The current composition of the Supervisory Board is also in line with this profile of skills and expertise. The independent members of the Supervisory Board within the meaning of article of the Code are or were Ms. Hessa Sultan Al-Jaber, Ms. Marianne Heiß, Ms. Louise Kiesling, Mr. Hussain Ali Al- Abdulla, Mr. Bernd Althusmann and Mr. Stephan Weil, as well as Ms. Annika Falkengren and Mr. Olaf Lies, who have since left the Supervisory Board. The curriculum vitae of the members of the Supervisory Board are available online at The statutory quota of at least 30% women and at least 30% men has applied to new appointments to the Supervisory Board of Volkswagen AG since January 1, 2016 as required by the Gesetz für die gleichberechtigte Teilhabe von Frauen und Männern an Führungspositionen in der Privatwirtschaft und im öffentlichen Dienst (FührposGleichberG Act on the Equal Participation of Women and Men in Leadership Positions in the Private and Public Sectors). Shareholder and employee representatives have resolved that each side will meet this quota separately. The shareholder representatives have met the quota of at least 30% women and at least 30% men since the 56 th Annual General Meeting on June 22, In the election of employee representatives to the Supervisory Board of Volkswagen AG on April 6, 2017, Ms. Ulrike Jakob, Ms. Bertina Murkovic and Mr. Athanasios Stimoniaris were elected to the Supervisory Board for the first time. The remaining employee representatives on the Supervisory Board were reappointed. The term of office began at the end of the Annual General Meeting on May 10, This means that the legally prescribed proportion of at least 30% women and at least 30% men is also complied with on the employee side of the board. Both the shareholder and the employee representatives fulfilled the quota on December 31, For the proportion of female members on the Board of Management that the Supervisory Board was required to set in accordance with the FührposGleichberG, the Supervisory Board set a target quota of 11.1% for the period after December 31, The new deadline set for achievement of this target is December 31, The appointment of Ms. Hiltrud Dorothea Werner, the Group Board of Management member responsible for Integrity and Legal Matters since February 1, 2017, brings the percentage of female members on the Group Board of Management to 11.1%. The target quota was thus fulfilled on December 31, For the proportion of women in management in accordance with the FührposGleichberG, Volkswagen AG has set itself the target of 13.0% women in the first level of management and 16.9% women in the second level of management for the period up to the end of As of December 31, 2017, the proportion of women in the active workforce at the first level of management was 10.4 (9.8)% and at the second level of management it was 14.0 (13.5)%. REMUNERATION REPORT Extensive explanations of the remuneration system and the individual remuneration of the members of the Board of Management and the Supervisory Board can be found in the Remuneration Report on pages 67 to 83 of the management report, in the notes to the consolidated financial statements on page 313, and on page 63 of the notes to the annual financial statements of Volkswagen AG. GROUP CORPORATE GOVERNANCE DECLARATION The Group corporate governance declaration forms part of the combined management report and is permanently available at It also contains the description of the diversity concepts for the Board of Management and Supervisory Board of Volkswagen AG. GROUP CORPORATE GOVERNANCE DECLARATION

67 Group Management Report Corporate Governance Report 63 COMPLIANCE Acting with integrity and compliant and ethical behavior are essential prerequisites for the success of the Volkswagen Group. For this reason, compliance with national and international laws and regulations, internal rules and voluntary commitments is among our Company s guiding principles. We are striving to strengthen the trust of our customers, our business partners and stakeholders in our Group through fair treatment. Compliant behavior is the basis for this and must be a matter of course for all Group employees. One of our Company s main tasks at the present time is to further enhance awareness of this. Commitment to compliance at the highest level At the Global Management Meeting in March 2017, Matthias Müller, Chairman of the Board of Management of Volkswagen AG, underlined that integrity and compliant behavior are the responsibility of each individual in the Group: Compliance and integrity are not something that can be delegated to another department or a single person everyone must play their part. At the presentation of the new Code of Conduct for the Volkswagen Group in September 2017, Hiltrud Dorothea Werner, member of the Board of Management responsible for Integrity and Legal Matters, said: It is our shared responsibility to bring the concept of integrity to life at Volkswagen. In practice, this involves us all being familiar with the rules in place, acting responsibly and making the right decisions. The new Code of Conduct provides the basis for this. Strengthening the compliance organization In light of the growing relevance of the topic of compliance, the Group s compliance organization was restructured in the reporting period. Since April 2017, Group Compliance has been a separate unit, with the Group Chief Compliance Officer reporting directly to the Board Member for Integrity and Legal Affairs; he also reports to the Audit Committee of the Supervisory Board. The structures, responsibilities and processes within this unit have also been honed and reinforced. The Volkswagen Group s compliance organization has been set up with divisional and regional compliance offices. This enables central corporate functions to be supported to an even greater extent and advised by their own compliance contacts. Additional centers of competence develop and manage key compliance issues for the entire Group. The heads of the centers of competence and the divisional and regional compliance offices report directly to the Group Chief Compliance Officer. Communication between the Group and brand compliance officers and networking were enhanced and intensified in the reporting period through regular meetings and team conferences. In the reporting period, there was direct communication on compliance issues at meetings of the Supervisory Board, the Board of Management and the Works Council, particularly by the Board Member for Integrity and Legal Affairs and the Group Chief Compliance Officer. The Group Compliance Committee chaired by the Board Member for Integrity and Legal Affairs was formed at top management level in This committee ensures that compliance and integrity standards are uniformly applied and communicated on a cross-divisional and cross-brand basis. The core compliance team, which concentrates expertise on compliance issues from different departments, remained unchanged. Compliance management system Our compliance management system is based on national and international standards. Its objective is to encourage and reinforce compliant behavior in the Group. The new Code of Conduct is the key element for strengthening awareness among staff of correct behavior and finding the right contact person in cases of doubt. Where laws and regulations have been seriously violated, our restructured whistleblower system is a suitable tool for taking appropriate action. We place value on communication and training seminars to permanently anchor compliance-related content among the workforce. The basis of compliance work in the Volkswagen Group is a systematic process of risk identification and reporting in accordance with the IDW standard AsS 980. We used 2017 to review the content of and the process for the existing compliance risk analysis. The objective is to obtain transparency at Group level of the risk exposure of all Group companies included in the compliance scope. However, we are also aware that even the best compliance management system can never entirely prevent the criminal actions of individuals. Code of Conduct and guidelines The Volkswagen Group Code of Conduct was completely overhauled in the reporting period and approved by the Group Board of Management. All Group companies are required to introduce the new Code of Conduct. This was completed at the brand level by December 31, Based on the 2010 Code of Conduct (for instance on the topic of environmental protection) the content was updated and new content added (such as product conformity). Readability and practical relevance were enhanced through a clear

68 64 Corporate Governance Report Group Management Report structure, simpler language and specific examples. It emphasizes each individual employee s responsibility as regards compliant behavior. The introduction of the new Code of Conduct was accompanied by an intensive internal communication drive in digital and print media. The Code of Conduct is a key component of compliance training and is also integrated into operating processes. For example, all new employment contracts for employees of Volkswagen AG include a reference to the Code of Conduct and the obligation to comply with it. In addition, compliance with the Code of Conduct remained a component of our employees annual reviews in the reporting period and was thus taken into account when calculating their variable, performance-related remuneration. In addition to the Code of Conduct, the Volkswagen Group s compliance framework incorporates the anti-corruption guidelines among others, including checklists and the express prohibition of facilitation payments, as well as guidelines on competition, antitrust law and anti-money laundering. Organizational instructions on dealing with gifts and invitations as well as on making donations also apply across the Group. Employees have access to the compliance rules and regulations in particular via the compliance pages on the Company intranet. Whistleblower system In the Volkswagen Group, the whistleblower system refers to the internal and external contact points, where employees and third parties can report potentially serious violations of laws and internal regulations by employees of the Volkswagen Group, in addition to the committees that support and monitor the work of these contact points. The Company has had a system for reporting any breaches of the law or regulations already since In 2017, the whistleblower system was improved and partially reorganized. The processes were optimized further as of November 1, 2017 to be able to follow up on reports even faster and in a fairer and more transparent manner. Among other things, a central Investigation Office was set up in the Compliance department at the beginning of the year, which is responsible for coordinating the whistleblower system in the Volkswagen Group and for processing information received concerning Volkswagen AG and its subsidiaries with the exception of AUDI AG, Dr. Ing. h.c. F. Porsche AG and Volkswagen Truck & Bus GmbH. These companies have separate investigative offices for themselves and their subsidiaries. The whistleblower system uses defined processes to investigate reports on breaches and to penalize misconduct where appropriate. Protection of both the whistleblower and the party affected has top priority in the applicable procedural principles and guarantees. In addition, a Group Guideline sets out the responsibilities in the Group and the specific procedure for the processing of reports. Information on misconduct can be submitted in any of the major languages used by the Group and are treated confidentially. The people providing the information need not fear any sanctions from the Company for their actions. They can decide for themselves whether they wish to give their names. For this reason, a specially protected online reporting channel was additionally set up in 2017 through which anonymized reports from whistleblowers can be sent to the Investigation Office. We also continue to rely on existing tried-and-tested channels such as ombudspersons (counsels of trust). As the whistleblower system was enhanced, reporting was reorganized, for example to ensure standard Group-wide handling. A total of 1,489 reports were registered throughout the Group in All substantiated reports have been, or will be, investigated, and any misconduct penalized. Communication, training and advice Providing information to employees at all levels on compliance and offering them advice is a core component of our compliance activities. The compliance organization regularly briefs the workforce on compliance-related issues using the internal Groupwide communication platform called Group Connect. Content on compliant behavior is also made public through the internal communication channels of the Group and its brands. Focal points of compliance communication in the reporting period were the introduction of the revised Code of Conduct and the further development of the whistleblower system. CODE OF CONDUCT OF THE VOLKSWAGEN GROUP VW_Konzern_deutsch.pdf WHISTLEBLOWER SYSTEM io@volkswagen.de

69 Group Management Report Corporate Governance Report 65 Furthermore, the topic of compliant behavior was intensely discussed at employee events and works meetings. In 2017, approximately 219,000 employees across the Group participated in various forms of training courses on compliance-related topics. Following a risk-based approach, mandatory compliance training is conducted for specific target groups. In addition to traditional lectures and online tutorials, case studies, role-playing games and other interactive formats form a part of the training provided to employees and managers. Another event held in 2017 was the Volkswagen Convention Integrity, Culture and Compliance, which was attended by more than 7,300 executives and works council members from Volkswagen AG, Volkswagen Sachsen and Volkswagen Osnabrück. The Convention was aimed at driving the change process forward at Volkswagen. Employees can use special addresses to solicit advice on compliance issues. Compliance key performance indicators To measure the level of target achievement, we defined a strategic indicator for the major brands that manufacture passenger cars: > Compliance, process reliability and a zero-defect culture. This indicator is based on an evaluation of the answers to three questions in the opinion survey relating to compliance with regulations and processes, transparency and monitoring, and dealing with risks and errors. In the case of adverse deviations, the departments will develop and implement measures. The indicator improved to (79.03)% during the reporting year. We have also defined a strategic indicator for the Financial Services Division the compliance and governance indicator. In addition to achieving our economic objectives, we are also striving to ensure compliance with legislation and legal requirements and are working towards a culture shaped by compliance and integrity. To this end, we have established a compliance function within the individual companies to accompany the implementation of suitable and effective compliance standards for fields of law that have been identified as significant. To evaluate the effectiveness thereof, we will consult examination and inspection findings from both the internal and external auditing, risk management and compliance, as well as the timely processing of the measures defined by these control units. Strengthening compliance in company processes The act to transpose the Fourth EU Money Laundering Directive into German law presented new challenges for Volkswagen AG as a company that is bound by the Gesetz über das Aufspüren von Gewinnen aus schweren Straftaten (GWG Law on Tracing Profits from Serious Criminal Offences). A Group Directive, which already exists in draft form, will define the minimum standard to be implemented by all Group companies. A concept for a new sales-related business partner check was drawn up in the reporting period. A key objective of this new process is the creation of transparency within the Volkswagen Group to prevent Group companies from entering into business relationships with business partners which other Group companies have classified as not acting with integrity. The sales-related business partner check will be gradually introduced in the Group from New business models are constantly being considered in the Volkswagen Group as part of the TOGETHER Strategy 2025 program. Areas on which these focus in particular are digitalization, automation and electrification, but also the development of and involvement in mobility concepts. Group Compliance helps the strategic business units to implement their forward-looking projects through individual risk assessments and recommendations based on these. In addition, compliance will become anchored in mergers and acquisitions and real estate transactions to a greater extent. Effectiveness review Independent reviews by the Group Internal Audit function at the corporate units and the regular exchange of information with external bodies help ensure continuous improvement of the compliance management system. There are no indications that our current compliance management system was ineffective in INTEGRITY Volkswagen AG is undergoing the most far-reaching process of change in the Company s history. Particularly the loss of trust as a result of the diesel issue clearly showed that, in terms of integrity, Volkswagen must become a role model for a modern, transparent and successful enterprise. This plan is one of the strategic goals of TOGETHER Strategy By setting up the new Board of Management position for Integrity and Legal Affairs on January 1, 2016, we created the organizational framework for a centralized integrity management function. This Group function is responsible for planning, preparing and implementing programs and projects aimed at raising awareness, providing explanation and intensifying a collective awareness of integrity as well as reinforcing a shared culture of integrity in the Company. A continuous exchange of ideas and discussion of issues relating to integrity are key components of the integrity management function.

70 66 Corporate Governance Report Group Management Report Behaving with integrity is a prerequisite for commercial success and for a positive future for the Company. Only with lasting, dependable integrity will our Company gain and strengthen the trust of its staff, customers, shareholders, business partners and the general public. Volkswagen will enhance the culture of integrity in the Company, thus creating a collective Group awareness for integrity. To this end, we launched an integrity program in 2016 that addresses all of the Company's employees. INDEPENDENT MONITOR In June 2017, Larry D. Thompson was appointed as the Independent Compliance Monitor at Volkswagen under the terms of the Plea Agreement with the United States Department of Justice announced on January 11, 2017 and confirmed by a US federal court on April 21, He will also work as Independent Compliance Auditor under the Third Partial Consent Decree concluded separately with the US Environmental Protection Agency (EPA) and the Third California Partial Consent Decree agreed with the State of California and the environmental authority California Air Resources Board, CARB (for more information on these agreements, please see the Litigation section starting on page 178). Mr. Thompson will assess and oversee Volkswagen s compliance with the terms of the Plea Agreement and Consent Decrees for a period of three years, which includes taking measures to further strengthen the Company s compliance, reporting and monitoring mechanisms and the implementation of an enhanced compliance and ethics program. RISK MANAGEMENT, AUDIT Carefully managing potential risks to the Company is a key component of our daily work. Volkswagen Group s risk management system is oriented toward identifying, assessing, communicating and managing risks at an early stage. This system is reviewed on an ongoing basis and adjusted if and when conditions change. A detailed description of the risk management system and our accounting-related internal control system can be found in the Risk Report on pages 164 to 167 of this annual report. The Supervisory Board has established an Audit Committee that in particular monitors the financial accounting, the financial accounting process, the effectiveness of the internal control system, the risk management system and the internal audit system, the audit of the financial statements and compliance. Furthermore, the Audit Committee makes a wellfounded recommendation for the election of auditor to the Supervisory Board, obtains a declaration of independence from the auditor, supervises the additional services provided by the auditor and prepares the audit engagement resolution, thereby giving consideration to the annual audit planning, the areas of emphasis for the audit, the agreed fee and the auditor s obligation to provide information. COMMUNICATION AND TRANSPARENCY The Volkswagen Group publishes a financial calendar listing all the relevant dates for its shareholders in its annual report and interim reports as well as on its website at Among other things, invitations to the shareholders meetings as well as agendas for these meetings and any motions to be added to the agenda or countermotions received are also available on this website. At the shareholders meetings, shareholders may exercise their voting rights themselves, have this right exercised on their behalf by a third-party proxy whom they have appointed, or use a proxy designated by the Company who votes on their behalf in accordance with their voting instructions. We also give our shareholders the opportunity to watch the introductory remarks of the Chairman of the Supervisory Board and the speech of the Chairman of the Board of Management on the internet. In addition, news and information on the Volkswagen Group are available on our website. The press releases and other information are published in both English and German. Immediately after their publication in accordance with legal requirements, the Company s ad-hoc releases are also published on the same website under the heading IR News, Ad-hoc Releases & Publications. We publish managers transactions pursuant to Article 19 of the Market Abuse Regulation or section 15a of the Wertpapierhandelsgesetz (WpHG German Securities Trading Act) under the heading Corporate Governance, menu item Directors Dealings. On the same web page under the heading IR News, Adhoc Releases & Publications, menu item Notifications of changes in voting rights you can also access details of the notifications filed in the reporting period in compliance with sections 21 ff. of the WpHG as well as notifications relating to other legal issues. The supervisory body appointments held by Board of Management members and Supervisory Board members can be found on pages 84 to 87 of this annual report. The shareholder structure is presented on page 110. MANDATORY PUBLICATIONS OF VOLKSWAGEN AG

71 Group Management Report Remuneration Report 67 Remuneration Report The Remuneration Report details the individualized remuneration of the Board of Management and the Supervisory Board of Volkswagen AG, broken down into components, as well as individualized pension provision disclosures for the members of the Board of Management. In addition, we explain in this chapter the main elements of the new remuneration system for the Board of Management. PRINCIPLES OF BOARD OF MANAGEMENT REMUNERATION The full Supervisory Board resolves on the remuneration system and the total remuneration for each individual member of Volkswagen AG s Board of Management on the basis of the Executive Committee s recommendations. The remuneration system implements the requirements of the Aktiengesetz (AktG German Stock Corporation Act) and the recommendations of the German Corporate Governance Code (the Code). In particular, the remuneration structure is focused on ensuring sustainable business development in accordance with the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG German Act on the Appropriateness of Executive Board Remuneration) and section 87(1) of the AktG. At the beginning of 2017, the Supervisory Board of Volkswagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, The new system for remuneration of the Board of Management was approved by the Annual General Meeting on May 10, 2017 with 80.96% of the votes cast. The adjustment, in which the Supervisory Board was assisted by renowned, independent external remuneration and legal consultants, resulted in an alignment with the new Group strategy TOGETHER Strategy The level of the Board of Management remuneration should be appropriate and attractive in the context of the Company s national and international peer group. Criteria include the tasks of the individual Board of Management member, their personal performance, the economic situation, the performance of and outlook for the Company, as well as how customary the remuneration is when measured against the peer group and the remuneration structure that applies to other areas of Volkswagen. In this context, comparative studies on remuneration are conducted on a regular basis. COMPONENTS OF BOARD OF MANAGEMENT REMUNERATION In this section, we provide an overview of the new remuneration system before going into the components of the remuneration for the reporting period. Overview of the new remuneration system The new remuneration system of the Board of Management comprises non-performance-related and performance-related components. The performance-related remuneration consists of an annual bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term. The performance share plan is linked to business development in the next three years and is thus based on a multiyear, forwardlooking assessment that reflects both positive and negative developments. The non-performance-related component creates an incentive for individual members of the Board of Management to perform their duties in the interests of the Company and to fulfill their obligation to act with proper business prudence without needing to focus on merely shortterm performance targets. The performance-related components, dependent among other criteria on the financial performance of the Company, serve to ensure the long-term impact of behavioral incentives. If 100% of the respectively agreed targets are achieved, the annual target remuneration for each member of the Board of Management will amount to a total of 4,500,000 (corresponding to a basic remuneration of 1,350,000, a target amount from the annual bonus of 1,350,000 and a target amount from the performance share plan of 1,800,000). The annual target remuneration for the Chairman of the Board of Management amounts to a total of 9,000,000 (basic remuneration of 2,125,000, a target amount from the annual

72 68 Remuneration Report Group Management Report bonus of 3,045,000, and a target amount from the performance share plan of 3,830,000). Annual minimum remuneration of 3.5 million (sum of basic and variable remuneration) was contractually agreed with Mr. Blessing. variable remuneration therefore reflect both positive and negative developments. The Supervisory Board may cap the performance-related/ variable remuneration components in the event of extraordinary developments. Non-performance-related remuneration The non-performance-related remuneration comprises fixed remuneration and fringe benefits. In addition to the basic level of remuneration, the fixed remuneration also includes differing levels of remuneration for appointments assumed at Group companies. The fringe benefits result from noncash benefits and include in particular the use of operating assets such as company cars and the payment of insurance premiums. Taxes due on these noncash benefits are mainly borne by Volkswagen AG. The basic level of remuneration is reviewed regularly and adjusted if necessary. Performance-related remuneration The performance-related/variable remuneration consists of an annual performance-related bonus with a one-year assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term (long-term incentive components) and phantom preferred shares. The components of performance-related/ Annual bonus The annual bonus is based upon the result for the respective fiscal year. Operating profit achieved by the Volkswagen Group plus the proportionate operating profit of the Chinese joint ventures form half of the basis for the annual bonus, with operating return on sales achieved by the Volkswagen Group making up the second half. Each of the two components of the annual bonus will only be payable if certain thresholds are exceeded or reached. The calculated payment amount may be individually reduced (multiplier of 0.8) or increased (multiplier of 1.2) by up to 20% by the Supervisory Board, taking into account the degree of achievement of individual targets agreed between the Supervisory Board and the respective member of the Board of Management, as well as the success of the full Board of Management in achieving the transformation of the Volkswagen Group s employees into new areas of activity. The payment amount for the annual bonus is capped at 180% of the target amount for the annual bonus. The cap arises from 150% of the maximum financial target achievement and a performance factor of a maximum of 1.2.

73 Group Management Report Remuneration Report 69 CALCULATION OF THE PAYMENT AMOUNT FOR THE ANNUAL BONUS TARGET TARGET ACHIEVEMENT = ANNUAL BONUS Company bonus Operational KPIs (0 150% target achievement) Performance factor Multiplier ( ) Payment amount 50 PERCENT COMPONENT 1 50 PERCENT COMPONENT 2 Target achievement in percent Target achievement in percent Operating result including Chinese joint ventures (proportionate) in billion Operating return on sales in percent COMPONENT 1: OPERATING RESULT INCLUDING CHINESE JOINT VENTURES (PROPORTIONATE) COMPONENT 2: OPERATING RETURN ON SALES billion 2017 % 2017 Maximum threshold % level of target 17.0 Minimum threshold 9.0 Actual 18.6 Target achievement (in %) 110 Maximum threshold % level of target 6.0 Minimum threshold 4.0 Actual 6.0 Target achievement (in %) 100

74 70 Remuneration Report Group Management Report Performance share plan long-term incentive (LTI) The LTI is granted to the Board of Management in the form of a performance share plan. Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted on the basis of the initial reference price of Volkswagen s preferred shares into performance shares of Volkswagen AG, which are allocated to the respective member of the Board of Management purely for calculation purposes. The conversion is performed based on the unweighted average of the closing prices of Volkswagen s preferred shares for the last 30 trading days preceding January 1 of a given fiscal year. At the end of each year, the number of performance shares is determined definitively for one-third of the three-year performance period based on the degree of target achievement for the annual earnings per Volkswagen preferred share (EPS earnings per share per preferred share in ). A prerequisite for this is that a threshold is reached. A cash settlement is made at the end of the three-year term of the performance share plan. The payment amount corresponds to the final number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The closing reference price is the unweighted average of the closing prices for Volkswagen s preferred shares for the 30 trading days preceding the last day of the three-year performance period Initial reference price Closing reference price 1 Dividend equivalent Determined at the end of the performance period. EPS PERFORMANCE MEASUREMENT Target achievement in percent EPS per preferred share in euros PERFORMANCE PERIOD Maximum threshold % level of target Minimum threshold Actual Target achievement (in %) 113 The payment amount under the performance share plan is limited to 200% of the target amount. An advance of 20% on the payment amount is paid if the average ratio of capex to sales revenue in the Automotive Division or the R&D ratio of the last three years is smaller than 5%. Should a member of the Board of Management leave the Company of their own volition without good cause before the performance shares are paid out or should that member start working for a competitor, the unpaid performance shares will expire. For members of the Board of Management who held their seat as of December 31, 2016, this rule only applies in the event of a future reappointment. Ms. Werner was appointed as a member of the Board of Management with effect from February 1, In the introductory phase of the performance share plan ( ), the members of the Board of Management who were Board members as of December 31, 2016 will receive advances of 80% of their target amount. The Chairman of the Board of Management will receive 100% of his target amount in advance. The two advances will each be paid after the first year of the performance period. After the last day of the relevant three-year performance period, settlement will be made based on actual achievement of targets. The Chairman of the Board of Management has been granted the option of immediate settlement of the performance shares at the end of his contract of service.

75 Group Management Report Remuneration Report 71 CALCULATION OF THE PAYMENT AMOUNT FROM THE PERFORMANCE SHARE PLAN TARGET Initial reference price Provisional performance shares (number) PERFORMANCE MEASUREMENT Final number determined for ⅓ of provisional performance shares multiplied by annual target achievement EPS per preferred share Final performance shares (number) PRICE PERFORMANCE AND DIVIDENDS Closing reference price plus dividend over term = LTI Payment amount ⅓ ⅓ Target achievement EPS per preferred share Fiscal year 1 Fiscal year 2 Fiscal year 3 ⅓ INFORMATION ON THE PERFORMANCE SHARES PERFORMANCE PERIOD Number of performance shares allocated at the grant date Fair value at the grant date Matthias Müller 29,959 4,309,602 Karlheinz Blessing 14,080 2,025,408 Herbert Diess 14,080 2,048,640 Francisco Javier Garcia Sanz 14,080 1,890,944 Jochem Heizmann 14,080 2,031,040 Andreas Renschler 14,080 1,891,648 Rupert Stadler 14,080 2,025,408 Hiltrud Dorothea Werner 12,907 1,856,672 Frank Witter 14,080 2,025,408 Total 141,426 20,104,770 Provision as of Dec. 31, 2017 Intrinsic value as of Dec. 31, 2017 Comprehensive income 2017 arising from performance shares Matthias Müller 10,201,381 4,728,427 10,201,381 Karlheinz Blessing 5,202,356 2,222,245 5,202,356 Herbert Diess 3,673,623 2,222,245 3,673,623 Francisco Javier Garcia Sanz 5,405,211 2,222,245 5,405,211 Jochem Heizmann 4,102,990 2,222,245 4,102,990 Andreas Renschler 4,747,249 2,222,245 4,747,249 Rupert Stadler 4,698,709 2,222,245 4,698,709 Hiltrud Dorothea Werner 623, ,526 Frank Witter 5,128,707 2,222,245 5,128,707 Total 43,783,751 20,284,141 43,783,751

76 72 Remuneration Report Group Management Report The number of performance shares includes the provisional performance shares allocated at the grant date of the performance share plan. The fair value as at the grant date was determined using a recognized valuation technique. The provision recognized as of December 31, 2017 reflects the obligation to the members of the Board of Management. To determine its amount, the performance shares expected for future performance periods were taken into account in addition to the provisional performance shares determined or allocated for the performance period The intrinsic value was calculated in accordance with IFRS 2 and corresponds to the amount that the members of the Board of Management would have received if they had stepped down on December 31, Only the nonforfeitable (vested) performance shares at the reporting date are included in the calculation. The intrinsic value was calculated based on the unweighted average share price for the 30 trading days (Xetra closing prices of Volkswagen s preferred shares) preceding December 31, 2017, taking the dividends paid per preferred share during the performance period into account. The net value of all amounts recognized in income for the performance shares in fiscal year 2017 is recorded in comprehensive income 2017 arising from performance shares according to IFRS. Phantom preferred shares The phantom preferred shares for the remuneration withheld for 2015 will form part of the Board of Management remuneration until they are paid out in Total remuneration cap In addition to the cap on the individual variable components of the remuneration for the members of the Board of Management, the annual benefits received according to the Code, consisting of basic remuneration and the variable remuneration components (i.e. annual bonus and performance share plan) for one fiscal year, may not exceed an amount of 10,000,000 for the Chairman of the Board of Management and of 5,500,000 for each member of the Board of Management. If the total amount is exceeded, the variable components will be reduced proportionately. Regular review and adjustment The Supervisory Board regularly reviews and, if necessary, adjusts the level of the total remuneration cap and the individual targets. Other agreements Members of the Board of Management with contracts entered into on or after January 1, 2010 are entitled to payment of their normal remuneration for six to twelve months in the event of illness. Contracts entered into before that date grant remuneration for six months. In the event of disability, they are entitled to the retirement pension. Surviving dependents receive a widow s pension of 66 % and orphans benefits of 20% of the former member of the Board of Management s pension. Contracts with members of the Board of Management whose first term of office began after April 1, 2015, provide for an entitlement in line with the principles of the works agreement that also applies to employees of Volkswagen AG covered by collective agreements to a widow s pension of 60%, an orphan s benefit of 10% for half-orphans and an orphan s benefit of 20% for full orphans, based in each case on the former member of the Board of Management s pension.

77 Group Management Report Remuneration Report 73 BENEFITS BASED ON PHANTOM PREFERRED SHARES FROM THE REMUNERATION WITHHELD FOR FISCAL YEAR 2015 At its meeting on April 22, 2016, Volkswagen AG s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance. This is being effected by first converting the amount withheld based on the average share price for the 30 trading days preceding April 22, 2016 (initial reference price) into phantom preferred shares of Volkswagen AG with a threeyear holding period and, at the same time, defining a target reference price corresponding to 125% of the initial reference price. During the holding period, the phantom preferred shares are entitled to a dividend equivalent in the amount of the dividends paid on real preferred shares. The shares will be reconverted and paid out either when the three-year holding period has expired or in the event that members retire early from office at the time that they do so. To determine the payment amount, the average share price for the 30 trading days preceding the last day of the holding period, i.e. April 22, 2019, or preceding the leaving date will be calculated (closing reference price). The difference between the target reference price and the initial reference price will be deducted from the closing reference price, and the dividends distributed on one real Volkswagen preferred share during the holding period (dividend equivalent) will be added to the closing reference price. The figure thus calculated will be multiplied by the number of phantom preferred shares so as to calculate the amount to be paid to each Board of Management member. This will ensure that excludingany dividend equivalents accrued the amount withheld is only paid out in full if the initial reference price of the preferred share has increased by at least 25%. Otherwise, the amount will be reduced accordingly to a minimum of 0. The amount disbursed may not be more than twice the amount originally withheld. If members of the Board of Management retire from office before the expiry of the holding period, the disbursement amount will be calculated and paid out proportionately based on the date that their contract of service ends. The number of phantom preferred shares granted on April 22, 2016 to the members of the Board of Management who were in office at that time did not change in fiscal year The fair value as of December 31, 2017 was determined using a recognized valuation technique. The intrinsic value was calculated in accordance with IFRS 2 and corresponds to the amount that the members of the Board of Management would have received if they had stepped down on December 31, The intrinsic value was calculated based on the average share price for the 30 trading days (Xetra closing prices of Volkswagen s preferred shares) preceding December 31, 2017, taking the initial reference price and the dividends for the relevant fiscal years into account. Comprehensive income 2017 arising from phantom preferred shares according to with IFRSs records the net amount arising from the fair value as of December 31, 2017 and December 31, Comprehensive income 2016 arising from phantom preferred shares in accordance with IFRSs records the net amount withheld (nominal) on the basis of acceptance by the Supervisory Board on April 22, 2016 of the statement made by the members of the Board of Management, and the corresponding fair value as of December 31, INFORMATION ON THE PHANTOM PREFERRED SHARES HELD IN 2017 Number of phantom shares Provision Dec. 31, 2017 Provision Dec. 31, 2016 Intrinsic value Dec. 31, 2017 Intrinsic value Dec. 31, 2016 Comprehensive income 2017 arising from phantom preferred shares Comprehensive income 2016 arising from phantom preferred shares 1 Matthias Müller 10,583 1,462,126 1,046,032 1,520,036 1,058, , ,880 Herbert Diess 4, , , , , ,732 57,024 Francisco Javier Garcia Sanz 8,633 1,192, ,293 1,239, , , ,147 Jochem Heizmann 8,633 1,192, ,293 1,239, , , ,147 Andreas Renschler 7,914 1,093, ,226 1,136, , , ,594 Rupert Stadler 8,633 1,192, ,293 1,239, , , ,147 Frank Witter 1, , , , ,980 78,241 26,356 Total 50,703 7,005,022 5,011,525 7,282,472 5,069,793 1,993, ,296 1 Income in 2016.

78 74 Remuneration Report Group Management Report REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT IN ACCORDANCE WITH THE GERMAN COMMERCIAL CODE Non-performancerelated components Performancerelated component Long-term incentive component Total remuneration Total remuneration Matthias Müller 1 2,317,735 3,513,207 4,309,602 10,140,544 7,251,929 Karlheinz Blessing 1,610,515 1,557,579 2,025,408 5,193,502 3,334,940 Herbert Diess 1,428,104 1,557,579 2,048,640 5,034,323 3,226,587 Francisco Javier Garcia Sanz 1,560,686 1,557,579 1,890,944 5,009,209 3,215,679 Jochem Heizmann 1,551,145 1,557,579 2,031,040 5,139,764 3,155,508 Christine Hohmann-Dennhardt (Jan. 1, 2016 Jan. 31, 2017) 2,3 109, ,361 10,051,621 Andreas Renschler 1,576,037 1,557,579 1,891,648 5,025,264 3,223,705 Rupert Stadler 1,419,734 1,557,579 2,025,408 5,002,721 3,050,317 Hiltrud Dorothea Werner (since Feb. 1, 2017) 1,341,819 1,427,781 1,856,672 4,626,272 Frank Witter 1,421,980 1,557,579 2,025,408 5,004,967 3,037,327 Total 14,337,116 15,844,041 20,104,770 50,285,927 39,547,612 1 The 2016 single-entity financial statements of Volkswagen AG reported total remuneration of 6,420, To compensate for lost entitlements resulting from the change in employer, Ms. Hohmann-Dennhardt received 6.3 million in Includes top-up amount on minimum remuneration of 3.5 million in 2016; variable remuneration determined by termination agreement. REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE The amounts shown as benefits received in the Board of Management remuneration tables in accordance with the Code correspond, in principle, to the amounts paid out for the fiscal year in question. In the introductory phase of the performance share plan (2017 to 2018), the members of the Board of Management who were Board members as of December 31, 2016 receive advances on the target amount, which in accordance with the Code are reported as benefits for the fiscal year in which the performance shares under the plan were allocated. The amounts shown as benefits granted in the Board of Management remuneration tables in accordance with the Code are based on 100% of the targets for the annual bonus and on the fair value at the grant date for the performance share plan. Since the members of the Board of Management agreed to the new remuneration on different dates, there is an individual grant date for each Board member and, consequently, a different fair value. The Board of Management remuneration tables in accordance with the Code, that show the benefits received, do not include any entries for the phantom preferred shares from the amount withheld for fiscal year 2015 because no payments were made to the Board of Management members in fiscal year The three-year holding period did not expire, nor did any Board members participating in the amount withheld step down in fiscal year Since the benefits based on phantom preferred shares were first agreed upon after the end of fiscal year 2015, consideration of the impact of these agreements is incorporated into the Board of Management remuneration (benefits granted) tables in accordance with the Code in the column for fiscal year The revised amount listed there is the difference between the fair value of the phantom preferred shares and the amount withheld on the date they were granted (April 22, 2016).

79 Group Management Report Remuneration Report 75 REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT (BENEFITS RECEIVED AND BENEFITS GRANTED) IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE MATTHIAS MÜLLER Chairman of the Board of Management Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 2,125,000 1,584,000 1,584,000 2,125,000 2,125,000 2,125,000 Fringe benefits 192, , , , , ,735 Total 2,317,735 1,762,651 1,762,651 2,317,735 2,317,735 2,317,735 One-year performance-related remuneration 3,513,207 1,499,278 1,313,200 3,045, ,481,000 Multiyear performance-related remuneration 3,830,000 3,990,000 6,352,610 4,309, ,660,000 LTI (performance share plan ) 3,830,000 4,309, ,660,000 Business performance bonus (two-year assessment period) 1,335,000 3,283,000 LTI (four-year assessment period) 2,655,000 3,375,000 Phantom shares 305,390 Total 9,660,942 7,251,929 9,428,461 9,672,337 2,317,735 15,458,735 Pension expense 612, , , , , ,807 Total remuneration 10,273,749 7,778,518 9,955,050 10,285,144 2,930,542 16,071,542 KARLHEINZ BLESSING Human Resources and Organization Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 Fringe benefits 260, , , , , ,515 Total 1,610,515 1,403,440 1,403,440 1,610,515 1,610,515 1,610,515 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,732,000 2,025, ,600,000 LTI (performance share plan ) 1,440,000 2,025, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Total 1 4,608,094 3,334,940 4,628,240 4,985,923 3,760,515 7,640,515 Pension expense 686, , , , , ,413 Total remuneration 5,294,507 4,077,482 5,370,782 5,672,336 4,446,928 8,326,928 1 Minimum for 2017 includes a top-up amount on minimum remuneration of 3.5 million.

80 76 Remuneration Report Group Management Report REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT (BENEFITS RECEIVED AND BENEFITS GRANTED) IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE HERBERT DIESS Chairman of the Brand Board of Management of Volkswagen Passenger Cars Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,260,000 1,260,000 1,350,000 1,350,000 1,350,000 Fringe benefits 78,104 35,087 35,087 78,104 78,104 78,104 Total 1,428,104 1,295,087 1,295,087 1,428,104 1,428,104 1,428,104 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,607,461 2,048, ,600,000 LTI (performance share plan ) 1,440,000 2,048, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 124,539 Total 4,425,683 3,226,587 4,395,348 4,826,744 1,428,104 7,458,104 Pension expense 814, , , , , ,654 Total remuneration 5,240,337 3,926,443 5,095,204 5,641,398 2,242,758 8,272,758 FRANCISCO JAVIER GARCIA SANZ Procurement Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,079,009 1,079,009 1,350,000 1,350,000 1,350,000 Fringe benefits 210, , , , , ,686 Total 1,560,686 1,284,179 1,284,179 1,560,686 1,560,686 1,560,686 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,482,839 1,890, ,600,000 LTI (performance share plan ) 1,440,000 1,890, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 249,161 Total 4,558,265 3,215,679 4,259,818 4,801,630 1,560,686 7,590,686 Pension expense 889, , , , , ,410 Total remuneration 5,447,675 3,976,543 5,020,682 5,691,040 2,450,096 8,480,096

81 Group Management Report Remuneration Report 77 REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT (BENEFITS RECEIVED AND BENEFITS GRANTED) IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE JOCHEM HEIZMANN China Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,351,278 1,102,017 1,102,017 1,351,278 1,351,278 1,351,278 Fringe benefits 199, , , , , ,867 Total 1,551,145 1,224,008 1,224,008 1,551,145 1,551,145 1,551,145 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,482,839 2,031, ,600,000 LTI (performance share plan ) 1,440,000 2,031, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 249,161 Total 4,548,724 3,155,508 4,199,647 4,932,185 1,551,145 7,581,145 Pension expense Total remuneration 4,548,724 3,155,508 4,199,647 4,932,185 1,551,145 7,581,145 CHRISTINE HOHMANN-DENNHARDT Integrity and Legal Affairs Joined: January 1, 2016, left: January 31, 2017 Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1 88,000 7,346,000 7,346,000 88,000 88,000 88,000 Fringe benefits 21, , ,621 21,361 21,361 21,361 Total 109,361 7,607,621 7,607, , , ,361 One-year performance-related remuneration 0 492,800 Multiyear performance-related remuneration 0 2,732,000 Business performance bonus (two-year assessment period) 0 1,232,000 LTI (four-year assessment period) 0 1,500,000 Other 2 2,444,000 Total 109,361 10,051,621 10,832, , , ,361 Pension expense 54, , ,657 54,091 54,091 54,091 Total remuneration 163,452 10,756,278 11,537, , , ,452 1 The previous year includes compensation of lost entitlements resulting from the change in employer in the amount of 6.3 million. 2 Includes top-up amount on minimum remuneration of 3.5 million in the previous year; variable remuneration determined by termination agreement.

82 78 Remuneration Report Group Management Report REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT (BENEFITS RECEIVED AND BENEFITS GRANTED) IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE ANDREAS RENSCHLER Commercial Vehicles Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 Fringe benefits 226, , , , , ,037 Total 1,576,037 1,292,205 1,292,205 1,576,037 1,576,037 1,576,037 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,503,637 1,891, ,600,000 LTI (performance share plan ) 1,440,000 1,891, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 228,363 Total 4,573,616 3,223,705 4,288,642 4,817,685 1,576,037 7,606,037 Pension expense 5,361,551 4,660,006 4,660,006 5,361,551 5,361,551 5,361,551 Total remuneration 9,935,167 7,883,711 8,948,648 10,179,236 6,937,588 12,967,588 RUPERT STADLER Chairman of the Board of Management of AUDI AG Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 Fringe benefits 69,734 62,817 62,817 69,734 69,734 69,734 Total 1,419,734 1,118,817 1,118,817 1,419,734 1,419,734 1,419,734 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,482,839 2,025, ,600,000 LTI (performance share plan ) 1,440,000 2,025, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 249,161 Total 4,417,313 3,050,317 4,094,456 4,795,142 1,419,734 7,449,734 Pension expense 829, , , , , ,730 Total remuneration 5,247,043 3,715,996 4,760,135 5,624,872 2,249,464 8,279,464

83 Group Management Report Remuneration Report 79 REMUNERATION OF THE MEMBERS OF THE BOARD OF MANAGEMENT (BENEFITS RECEIVED AND BENEFITS GRANTED) IN ACCORDANCE WITH THE GERMAN CORPORATE GOVERNANCE CODE HILTRUD DOROTHEA WERNER Integrity and Legal Affairs Joined: February 1, 2017 Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,237,500 1,237,500 1,237,500 1,237,500 Fringe benefits 104, , , ,319 Total 1,341,819 1,341,819 1,341,819 1,341,819 One-year performance-related remuneration 1,427,781 1,237, ,227,500 Multiyear performance-related remuneration 1,856, ,300,000 LTI (performance share plan ) 1,856, ,300,000 Total 2,769,600 4,435,991 1,341,819 6,869,319 Pension expense 930, , , ,689 Total remuneration 3,700,289 5,366,680 2,272,508 7,800,008 FRANK WITTER Finance and Controlling Benefits received Benefits granted (minimum) 2017 (maximum) Fixed remuneration 1,350,000 1,056,000 1,056,000 1,350,000 1,350,000 1,350,000 Fringe benefits 71,980 49,827 49,827 71,980 71,980 71,980 Total 1,421,980 1,105,827 1,105,827 1,421,980 1,421,980 1,421,980 One-year performance-related remuneration 1,557, , ,800 1,350, ,430,000 Multiyear performance-related remuneration 1,440,000 1,681,000 2,674,522 2,025, ,600,000 LTI (performance share plan ) 1,440,000 2,025, ,600,000 Business performance bonus (two-year assessment period) 501,000 1,232,000 LTI (four-year assessment period) 1,180,000 1,500,000 Phantom shares 57,478 Total 4,419,559 3,037,327 4,273,149 4,797,388 1,421,980 7,451,980 Pension expense 692, , , , , ,743 Total remuneration 5,112,302 3,624,543 4,860,365 5,490,131 2,114,723 8,144,723

84 80 Remuneration Report Group Management Report POST-EMPLOYMENT BENEFITS In the event of regular termination of their service on the Board of Management, the members of the Board of Management are entitled to a pension, including a surviving dependents pension, as well as the use of company cars for the period in which they receive their pension. The agreed benefits are paid or made available when the Board of Management member reaches the age of 63. As a departure from this principle, Mr. Renschler is able to start drawing his pension when he reaches the age of 62. The retirement pension is calculated as a percentage of the basic level of remuneration. Starting at 50%, the individual percentage increases by two percentage points for each year of service. In the case of the Chairman of the Board of Management, increases of 4.5 percentage points as of March 1, 2017, 4.5 percentage points as of March 1, 2018 and 5.0 percentage points as of March 1, 2019 are provided for. In specific cases, credit is given for previous employment periods and retirement pensions earned. In a departure from this rule, a retirement pension entitlement of 62% of the basic level of remuneration was set for Mr. Renschler on his appointment. The Supervisory Board has capped the percentage at 70%. These benefits are not broken down any further into performance-related components and long-term incentive components. Mr. Garcia Sanz and Mr. Heizmann reached a retirement pension entitlement of 70% of their basic level of remuneration at the end of 2017 the entitlement for Mr. Renschler and Mr. Stadler is 66%. Mr. Müller had a retirement pension entitlement of 57.5% of the basic level of remuneration as of the end of The increase in the basic remuneration as a consequence of the new remuneration system in place from fiscal year 2017 is therefore not taken into account for the incumbent members of the Board of Management of Volkswagen AG with an existing occupational pension based on final remuneration. With regard to the existing defined contribution pension schemes for the current members of the Board of Management of Volkswagen Aktiengesellschaft, the basis used to determine the pension contributions shall in each case be increased by the difference between the previous basic remuneration and the newly determined basic remuneration (at an unchanged contribution rate of 50% of the basic remuneration). For future members of the Board of Management with a defined contribution pension scheme, a contribution rate of 40% of the basic remuneration will be credited to the pension account. Ms. Hohmann-Dennhardt and Ms. Werner as well as Mr. Blessing, Mr. Diess and Mr. Witter received a defined contribution plan, which is based in principle on a works agreement that also applies to the employees of Volkswagen AG covered by collective agreements and includes retirement, invalidity and surviving dependents benefits. A pension con- tribution in the amount of 50% of the basic level of remuneration is paid to Volkswagen Pension Trust e.v. at the end of the calendar year for each year they are appointed to the Board of Management. The annual pension contributions result in modules of what is, in principle, a lifelong pension in line with the arrangements that also apply to employees covered by collective agreements. The individual pension modules vest immediately upon payment to Volkswagen Pension Trust e.v. Instead of a lifelong pension, benefits can optionally be paid out as a lump sum or in installments when the beneficiary reaches retirement age currently 63 at the earliest. Volkswagen AG has assumed responsibility for pension entitlements due to Mr. Witter from the time before his service with the Company, although these cannot be claimed before he reaches the age of 60. On December 31, 2017, the pension obligations for members of the Board of Management in accordance with IAS 19 amounted to (113.5) million (11.7) million was added to the provision in the reporting period in accordance with IAS 19. Other benefits such as surviving dependents pensions and the use of company cars are also factored into the measurement of pension provisions. The pension obligations measured in accordance with German GAAP amounted to 92.4 (77.2) million. Measured in accordance with German GAAP, 15.8 (7.0) million was added to the provision in the reporting period. Current pensions are index-linked in accordance with the index-linking of the highest collectively agreed salary insofar as the application of section 16 of the Gesetz zur Verbesserung der betrieblichen Altersversorgung (BetrAVG German Company Pension Act) does not lead to a larger increase. Retired members of the Board of Management and their surviving dependents received 19.9 (11.1) million, or 19.9 (11.1) million measured in accordance with German GAAP, in the past year. Obligations for pensions for this group of persons measured in accordance with IAS 19 amounted to (270.0) million, or (205.6) million measured in accordance with German GAAP. The following rule applies to Board of Management contracts entered into for the first term of office before August 5, 2009: the retirement pension to be granted after a member of the Board of Management leaves the Company is payable immediately if the member s contract is not renewed by the Company, and in other cases when the member reaches the age of 63. Any remuneration received from other sources until the age of 63 is deductible from the benefit entitlement up to a certain fixed amount. The following general rule applies to contracts for the first term of office of members of the Board of Management entered into after August 5, 2009: the retirement pension to be granted after a member of the Board of Management leaves the Company is payable when the member reaches the age of 63.

85 Group Management Report Remuneration Report 81 EARLY TERMINATION BENEFITS If the appointment to the Board of Management is terminated for cause through no fault of the Board of Management member, the claims under Board of Management contracts entered into since November 20, 2009 are limited to a maximum of two years remuneration, in accordance with the recommendation in section 4.2.3(4) of the Code (severance payment cap). For Board of Management members who are commencing their third or later term of office, existing rights under contracts entered into before November 20, 2009 are grandfathered. No severance payment is made if the appointment to the Board of Management is terminated for good reason for which the Board of Management member is responsible. The members of the Board of Management are also entitled to a pension and to a surviving dependents pension as well as the use of company cars for the period in which they receive their pension in the event of early termination of their service on the Board of Management. Please refer to notes 43 and 46 to the consolidated financial statements and the notes to the annual financial statements of Volkswagen AG for more detailed individual disclosures relating to members of the Board of Management who left the Company in fiscal year PENSIONS OF THE MEMBERS OF THE BOARD OF MANAGEMENT IN 2017 (PRIOR-YEAR FIGURES IN BRACKETS) Pension expense Present value as of December 31 1 Matthias Müller 612,807 30,065,068 (526,589) (27,254,749) Karlheinz Blessing 686,413 1,623,275 (742,542) (742,542) Herbert Diess 814,654 2,169,255 (699,856) (1,298,635) Francisco Javier Garcia Sanz 889,410 22,544,823 (760,864) (21,752,138) Jochem Heizmann 19,254,055 (19,836,613) Christine Hohmann-Dennhardt (Jan. 1, 2016 Jan. 31, 2017) 54,091 (704,657) (704,657) Andreas Renschler 5,361,551 16,278,653 (4,660,006) (11,231,016) Rupert Stadler 829,730 22,262,176 (665,679) (21,530,818) Hiltrud Dorothea Werner (since Feb. 1, 2017) 930, ,823 Frank Witter 692,743 10,214,190 (587,216) (9,100,545) Total 10,872, ,387,318 (9,347,409) (113,451,713) 1 The amount is reported in the total amount for defined benefit plans reported in the balance sheet (see note 29 to the consolidated financial statements).

86 82 Remuneration Report Group Management Report SUPERVISORY BOARD REMUNERATION Following its regular review of Supervisory Board remuneration, the Supervisory Board proposed a reorganization of the system of Supervisory Board remuneration to the 2017 Annual General Meeting, which was approved on May 10, 2017 with 99.98% of the votes cast. The remuneration of the members of the Supervisory Board of Volkswagen AG no longer contains any performance-related remuneration components but consists entirely of non-performance-related remuneration components. This is in line with the trend in supervisory board remuneration at DAX-listed companies, most of whose supervisory board remuneration now comprises fixed remuneration only. Compared with other large listed companies in Germany, the amount of the proposed remuneration components is also standard for the market and is appropriate. This was confirmed by a renowned, external remuneration consultant who assisted the Supervisory Board in reorganizing the remuneration system for members of the Supervisory Board. Remuneration for supervisory board work at subsidiaries continues in part to comprise a mix of non-performance-related and performancerelated components. The following applies to members of the Supervisory Board of Volkswagen AG with retroactive effect from January 1, 2017: > Members of the Supervisory Board receive fixed remuneration of 100,000 per fiscal year. > The Chairman of the Supervisory Board receives fixed remuneration of 300,000, while the Deputy Chairman receives remuneration of 200,000. > For their work in the Supervisory Board committees, the members of the Supervisory Board also receive additional fixed remuneration of 50,000 per committee per fiscal year provided the committee met at least once per year for the performance of its duties. Memberships of the Nomination and Mediation Committees established in accordance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act) are not taken into account. > Committee chairpersons receive double this amount, while deputy chairpersons receive one-and-a-half times the committee remuneration listed above. > Membership of no more than two committees is taken into account, whereby the two functions with the highest remuneration are counted if this maximum number is exceeded. > Supervisory Board members who belonged to the Supervisory Board or one of its committees for only part of the fiscal year receive proportionate remuneration. > Supervisory Board members receive an attendance fee of 1,000 for attending a meeting of the Supervisory Board or one of its committees; if several meetings are held on one day, the attendance fee is paid only once. > The remuneration and attendance fees are each payable after the end of the fiscal year. In fiscal year 2017, the members of the Supervisory Board received 3,786,839 (5,396,565). Of this figure, 2,000,000 related to the work of the Supervisory Board and 836,389 related to the work in the committees.

87 Group Management Report Remuneration Report 83 REMUNERATION OF THE MEMBERS OF THE SUPERVISORY BOARD FIXED REMUNERA- TION WORK IN THE COMMITTEES OTHER 1 TOTAL WAIVER FOR 2016 TOTAL Hans Dieter Pötsch 65, ,800 Jörg Hofmann 2 200,000 75,000 20, ,000 31, ,333 Hussain Ali Al-Abdulla 100,000 7, ,000 60, ,167 Hessa Sultan Al-Jaber 100,000 11, ,000 31,504 89,865 Bernd Althusmann 3 (since Dec. 14, 2017) 4,583 4,583 Birgit Dietze 2 100,000 50,000 13, ,000 47, ,252 Annika Falkengren 100,000 38,750 12, ,750 84, ,250 Hans-Peter Fischer 2 100,000 9, ,000 60, ,167 Uwe Fritsch 2 (until May 10, 2017) 35,972 17,986 9,000 62,958 70, ,990 Uwe Hück 2 100,000 80, ,500 60, ,667 Johan Järvklo 2 100,000 10, ,000 60, ,167 Ulrike Jakob 2 (since May 10, 2017) 64,028 4,000 68,028 Louise Kiesling 100,000 11, ,000 60, ,167 Olaf Lies 3 (until Dec. 14, 2017) 95,417 47,639 20, ,056 80, ,250 Peter Mosch 2 100,000 91, , ,107 61, ,850 Bertina Murkovic 2 (since May 10, 2017) 64,028 32,014 6, ,042 Bernd Osterloh 2 100,000 98,021 28, ,021 19, ,250 Hans Michel Piëch 100, , ,600 60, ,736 Ferdinand Oliver Porsche 100, , , ,100 54, ,933 Wolfgang Porsche 100, , , ,400 49, ,233 Athanasios Stimoniaris 2 (since May 10, 2017) 64, , ,778 Stephan Weil 3 100,000 50,000 24, ,000 75, ,250 Stephan Wolf 2 (until May 10, 2017) 35,972 17,986 11,000 64,958 75, ,250 Thomas Zwiebler 2 (until May 10, 2017) 35,972 17,986 7,000 60,958 81, ,250 Members of the Supervisory Board who retired in the previous year 183,739 Total 2,000, , ,450 3,786,839 1,188,190 5,396,566 1 Attendance fees, membership of other Group bodies (non-performance-related: 257,000; performance-related: 270,450). 2 These employee representatives have stated that they will transfer their Supervisory Board remuneration to the Hans Böckler Foundation in accordance with the guidelines issued by the German Confederation of Trade Unions (DGB). 3 Under section 5(3) of the Niedersächsisches Ministergesetz (Act Governing Ministers of the State of Lower Saxony), these members of the Supervisory Board are obliged to transfer their Supervisory Board remuneration to the State of Lower Saxony as soon as and to the extent that it exceeds 6,200 per annum. Remuneration is defined for this purpose as Supervisory Board remuneration and attendance fees exceeding the amount of 200. The remuneration disclosed for members of the Supervisory Board for 2016 shows the amounts determined on the basis of the old system of Supervisory Board remuneration. The members of the Supervisory Board declared to the Management Board that they waive the portion of their remuneration for fiscal year 2016 that exceeds the amount that would have resulted for fiscal year 2016 from implementing the system of Supervisory Board remuneration resolved by the Annual General Meeting on May 10, 2017 with retroactive effect from January 1, The total amount waived for 2016 by the members of the Supervisory Board is 1,188,190. Mr. Pötsch additionally waived an amount of 115, of his variable remuneration for fiscal year 2016 and waived his remuneration for fiscal year 2017 in full. The reason for this waiver is the agreement made in connection with Mr. Pötsch s transfer from the Board of Management to the Supervisory Board as of October 8, 2015, it had been agreed to deduct the amount of Supervisory Board remuneration received up to December 31, 2017 from the compensation payment for his Board of Management remuneration to which he would have been entitled for the period from October 8, 2015 to December 31, 2017.

88 84 Executive Bodies Group Management Report Executive Bodies Members of the Board of Management and their appointments Appointments: as of December 31, 2017 or the leaving date from the Board of Management of Volkswagen AG MATTHIAS MÜLLER (64) Chairman (since September 26, 2015) March 1, Member of the Executive Board of Porsche Automobil Holding SE October 13, DR. RER. SOC. KARLHEINZ BLESSING (60) Human Resources and Organization January 1, Appointments: Wolfsburg AG, Wolfsburg DR.-ING. HERBERT DIESS (59) Chairman of the Brand Board of Management of Volkswagen Passenger Cars July 1, Appointments: Infineon Technologies AG, Neubiberg DR. RER. POL. H.C. FRANCISCO JAVIER GARCIA SANZ (60) Procurement July 1, Appointments: Hochtief AG, Essen Criteria CaixaHolding S.A., Barcelona PROF. DR. RER. POL. DR.-ING. E.H. JOCHEM HEIZMANN (65) China January 11, Appointments: Lufthansa Technik AG, Hamburg DR. JUR. CHRISTINE HOHMANN-DENNHARDT (67) Integrity and Legal Affairs January 1, 2016 January 31, Appointments (as of January 31, 2017): Messe Frankfurt GmbH, Frankfurt am Main ANDREAS RENSCHLER (59) Commercial Vehicles February 1, Appointments: Deutsche Messe AG, Hanover PROF. RUPERT STADLER (54) Chairman of the Board of Management of AUDI AG January 1, Appointments: FC Bayern München AG, Munich HILTRUD DOROTHEA WERNER (51) Integrity and Legal Affairs February 1, FRANK WITTER (58) Finance and Controlling October 7, As part of their duty to manage and supervise the Group s business, the members of the Board of Management hold other offices on the supervisory boards of consolidated Group companies and other significant investees. Membership of statutory supervisory boards in Germany. Comparable appointments in Germany and abroad. 1 Beginning or period of membership of the Board of Management.

89 Group Management Report Executive Bodies 85 Executive Bodies Members of the Supervisory Board and their appointments Appointments: as of December 31, 2017 or the leaving date from the Supervisory Board of Volkswagen AG HANS DIETER PÖTSCH (66) Chairman (since October 7, 2015) Chairman of the Executive Board and Chief Financial Officer of Porsche Automobil Holding SE October 7, Appointments: AUDI AG, Ingolstadt Autostadt GmbH, Wolfsburg (Chairman) Bertelsmann Management SE, Gütersloh Bertelsmann SE & Co. KGaA, Gütersloh Dr. Ing. h.c. F. Porsche AG, Stuttgart Wolfsburg AG, Wolfsburg Porsche Austria Gesellschaft m.b.h., Salzburg (Chairman) Porsche Holding Gesellschaft m.b.h., Salzburg (Chairman) Porsche Retail GmbH, Salzburg (Chairman) VfL Wolfsburg-Fußball GmbH, Wolfsburg (Deputy Chairman) Volkswagen Truck & Bus GmbH, Braunschweig JÖRG HOFMANN (62) Deputy Chairman (since November 20, 2015) First Chairman of IG Metall November 20, Appointments: Robert Bosch GmbH, Stuttgart DR. JUR. KLAUS LIESEN (86) July 2, 1987 May 3, Honorary Chairman of the Supervisory Board of Volkswagen AG (May 3, 2006 March 30, 2017) Dr. Liesen died on March 30, DR. HUSSAIN ALI AL-ABDULLA (60) Minister of State April 22, Appointments: Gulf Investment Corporation, Safat/Kuwait Kirnaf Finance, Riyadh (Chairman) Masraf Al Rayan, Doha (Chairman) Qatar Holding, Doha Qatar Investment Authority, Doha DR. HESSA SULTAN AL-JABER (58) Minister of State June 22, Appointments: Droobi Health Technology, Doha Malomatia, Doha Qatar Satellite Company, Doha Trio Investment, Doha DR. BERND ALTHUSMANN (51) Minister of Economic Affairs, Labor, Transport and Digitalization for the Federal State of Lower Saxony December 14, Appointments: Deutsche Messe AG, Hanover Container Terminal Wilhelmshaven JadeWeserPort- Marketing GmbH & Co. KG, Wilhelmshaven JadeWeserPort Realisierungs GmbH & Co. KG, Wilhelmshaven JadeWeserPort Realisierungs-Beteiligungs GmbH, Wilhelmshaven Niedersachsen Ports GmbH & Co. KG, Oldenburg (Chairman) BIRGIT DIETZE (44) Secretary to the Board of IG Metall June 1, ANNIKA FALKENGREN (55) Managing Partner of Compagnie Lombard Odier SCmA May 3, 2011 February 5, Appointments (as of February 5, 2018): FAM AB, Stockholm DR. JUR. HANS-PETER FISCHER (58) Chairman of the Board of Management of Volkswagen Management Association January 1, Appointments: Volkswagen Pension Trust e.v., Wolfsburg UWE FRITSCH (61) Chairman of the Works Council of the Volkswagen AG Braunschweig plant April 19, 2012 May 10, Appointments (as of May 10, 2017): Eintracht Braunschweig GmbH & Co KGaA, Braunschweig Basketball Löwen Braunschweig GmbH, Braunschweig MARIANNE HEISS (45) Chief Financial Officer of BBDO Group Germany GmbH, Düsseldorf February 14, Membership of statutory supervisory boards in Germany. Comparable appointments in Germany and abroad. 1 Beginning or period of membership of the Supervisory Board.

90 86 Executive Bodies Group Management Report UWE HÜCK (55) Chairman of the General and Group Works Councils of Dr. Ing. h.c. F. Porsche AG July 1, Appointments: Dr. Ing. h.c. F. Porsche AG, Stuttgart (Deputy Chairman) JOHAN JÄRVKLO (44) Chairman of IF Metall at Scania AB November 22, Appointments: Scania CV AB, Södertälje Volkswagen Truck & Bus GmbH, Braunschweig ULRIKE JAKOB (57) Deputy Chairwoman of the Works Council of Volkswagen AG, Kassel plant May 10, DR. LOUISE KIESLING (60) Designer and entrepreneur April 30, OLAF LIES (50) February 19, 2013 December 14, Appointments (as of December 14, 2017): Deutsche Messe AG, Hanover Container Terminal Wilhelmshaven JadeWeserPort- Marketing GmbH & Co. KG, Wilhelmshaven Demografieagentur für die niedersächsische Wirtschaft GmbH, Hanover (Chairman) JadeWeserPort Realisierungs GmbH & Co. KG, Wilhelmshaven JadeWeserPort Realisierungs-Beteiligungs GmbH, Wilhelmshaven BERTINA MURKOVIC (60) Chairwoman of the Works Council of Volkswagen Commercial Vehicles May 10, BERND OSTERLOH (61) Chairman of the General and Group Works Councils of Volkswagen AG January 1, Appointments: Autostadt GmbH, Wolfsburg Wolfsburg AG, Wolfsburg Allianz für die Region GmbH, Braunschweig Porsche Holding Gesellschaft m.b.h., Salzburg SEAT, S.A., Martorell ŠKODA Auto a.s., Mladá Boleslav VfL Wolfsburg-Fußball GmbH, Wolfsburg Volkswagen Immobilien GmbH, Wolfsburg Volkswagen Truck & Bus GmbH, Braunschweig DR. JUR. HANS MICHEL PIËCH (75) Lawyer in private practice August 7, Appointments: AUDI AG, Ingolstadt Dr. Ing. h.c. F. Porsche AG, Stuttgart Porsche Automobil Holding SE, Stuttgart (Deputy Chairman) Porsche Cars Great Britain Ltd., Reading Porsche Cars North America Inc., Atlanta Porsche Holding Gesellschaft m.b.h., Salzburg Porsche Ibérica S.A., Madrid Porsche Italia S.p.A., Padua Schmittenhöhebahn AG, Zell am See Volksoper Wien GmbH, Vienna DR. JUR. FERDINAND OLIVER PORSCHE (56) Member of the Board of Management of Familie Porsche AG Beteiligungsgesellschaft August 7, Appointments: AUDI AG, Ingolstadt Dr. Ing. h.c. F. Porsche AG, Stuttgart Porsche Automobil Holding SE, Stuttgart Porsche Holding Gesellschaft m.b.h., Salzburg Porsche Lizenz- und Handelsgesellschaft mbh & Co. KG, Ludwigsburg Volkswagen Truck & Bus GmbH, Braunschweig DR. RER. COMM. WOLFGANG PORSCHE (74) Chairman of the Supervisory Board of Porsche Automobil Holding SE; Chairman of the Supervisory Board of Dr. Ing. h.c. F. Porsche AG April 24, Appointments: AUDI AG, Ingolstadt Dr. Ing. h.c. F. Porsche AG, Stuttgart (Chairman) Porsche Automobil Holding SE, Stuttgart (Chairman) Familie Porsche AG Beteiligungsgesellschaft, Salzburg (Chairman) Porsche Cars Great Britain Ltd., Reading Porsche Cars North America Inc., Atlanta Porsche Holding Gesellschaft m.b.h., Salzburg Porsche Ibérica S.A., Madrid Porsche Italia S.p.A., Padua Schmittenhöhebahn AG, Zell am See PETER MOSCH (45) Chairman of the General Works Council of AUDI AG January 18, Appointments: AUDI AG, Ingolstadt Audi Pensionskasse Altersversorgung der AUTO UNION GmbH, VVaG, Ingolstadt Membership of statutory supervisory boards in Germany. Comparable appointments in Germany and abroad. 1 Beginning or period of membership of the Supervisory Board.

91 Group Management Report Executive Bodies 87 ATHANASIOS STIMONIARIS (46) Chairman of the Works Council and of the General Works Council of MAN Truck & Bus AG and Chairman of the Group Works Council of MAN SE and of the SE Works Council May 10, Appointments: MAN SE, Munich MAN Truck & Bus AG, Munich (Deputy Chairman) Rheinmetall MAN Military Vehicles GmbH, Munich Volkswagen Truck & Bus GmbH, Braunschweig STEPHAN WEIL (59) Minister-President of the Federal State of Lower Saxony February 19, STEPHAN WOLF (51) January 1, 2013 May 10, Appointments (as of May 10, 2017): Volkswagen Financial Services AG, Braunschweig Wolfsburg AG, Wolfsburg Volkswagen Pension Trust e.v., Wolfsburg THOMAS ZWIEBLER (52) May 15, 2010 May 10, COMMITTEES OF THE SUPERVISORY BOARD AS OF DECEMBER 31, 2017 Members of the Executive Committee Hans Dieter Pötsch (Chairman) Jörg Hofmann (Deputy Chairman) Peter Mosch Bernd Osterloh Dr. Wolfgang Porsche Stephan Weil Members of the Mediation Committee established in accordance with section 27(3) of the Mitbestimmungsgesetz (German Codetermination Act) Hans Dieter Pötsch (Chairman) Jörg Hofmann (Deputy Chairman) Bernd Osterloh Stephan Weil Members of the Audit Committee Dr. Ferdinand Oliver Porsche (Chairman) Bernd Osterloh (Deputy Chairman) Birgit Dietze n.n. Members of the Nomination Committee Hans Dieter Pötsch (Chairman) Dr. Wolfgang Porsche Stephan Weil Special Committee on Diesel Engines Dr. Wolfgang Porsche (Chairman) Peter Mosch Bertina Murkovic Bernd Osterloh Dr. Ferdinand Oliver Porsche n.n. Membership of statutory supervisory boards in Germany. Comparable appointments in Germany and abroad. 1 Beginning or period of membership of the Supervisory Board.

92 88 Disclosures Required Under Takeover Law Group Management Report Disclosures Required Under Takeover Law This section contains the Volkswagen Group s disclosures relating to takeover law required by sections 289(4) and 315(4) of the HGB. CAPITAL STRUCTURE Volkswagen AG s share capital amounted to 1,283,315, ( 1,283,315,873.28) on 31 December, It was composed of 295,089,818 ordinary shares and 206,205,445 preferred shares. Each share conveys a notional interest of 2.56 in the share capital. SHAREHOLDER RIGHTS AND OBLIGATIONS The shares convey pecuniary and administrative rights. The pecuniary rights include in particular the shareholders right to participate in profits (section 58(4) of the Aktiengesetz (AktG German Stock Corporation Act)), the right to participate in liquidation proceeds (section 271 of the AktG) and preemptive rights to shares in the event of capital increases (section 186 of the AktG) that can be disapplied by the Annual General Meeting with the approval of the Special Meeting of Preferred Shareholders, where appropriate. Administrative rights include the right to attend the Annual General Meeting and the right to speak there, to ask questions, to propose motions and to exercise voting rights. Shareholders can enforce these rights in particular through actions seeking disclosure and actions for avoidance. Each ordinary share grants the holder one vote at the Annual General Meeting. The Annual General Meeting elects shareholder representatives to the Supervisory Board and elects the auditors; in particular, it resolves on the appropriation of net profit, formally approves the actions of the Board of Management and the Supervisory Board, and resolves on amendments to the Articles of Association of Volkswagen AG, capitalization measures and authorizations to purchase treasury shares; if required, it also resolves on the performance of a special audit, the removal before the end of their term of office of Supervisory Board members elected at the Annual General Meeting and the winding-up of the Company. Preferred shareholders generally have no voting rights. However, in the exceptional case that they are granted voting rights by law (for example, when preferred share dividends were not paid in one year and not compensated for in full in the following year), each preferred share also grants the holder one vote at the Annual General Meeting. Furthermore, preferred shares entitle the holder to a 0.06 higher dividend than ordinary shares (further details on this right to preferred and additional dividends are specified in Article 27(2) of the Articles of Association of Volkswagen AG). The Gesetz über die Überführung der Anteilsrechte an der Volkswagenwerk Gesellschaft mit beschränkter Haftung in private Hand (VW-Gesetz Act on the Privatization of Shares of Volkswagenwerk Gesellschaft mit beschränkter Haftung) of July 21, 1960, as amended on July 30, 2009, includes various provisions in derogation of the German Stock Corporation Act, for example on the exercise of voting rights by proxy (section 3 of the VW-Gesetz) and on majority voting requirements at the Annual General Meeting (section 4(3) of the VW- Gesetz). In accordance with the Volkswagen AG Articles of Association (Article 11(1)), the State of Lower Saxony is entitled to appoint two members of the Supervisory Board of Volkswagen AG for as long as it directly or indirectly holds at least 15% of Volkswagen AG s ordinary shares. In addition, resolutions by the Annual General Meeting that are required by law to be adopted by a qualified majority require a majority of more than four-fifths of the share capital of the Company represented when the resolution is adopted (Article 25(2)), regardless of the provisions of the VW-Gesetz.

93 Group Management Report Disclosures Required Under Takeover Law 89 SHAREHOLDINGS EXCEEDING 10% OF VOTING RIGHTS Shareholdings in Volkswagen AG that exceed 10% of voting rights are shown in the notes to the annual financial statements of Volkswagen AG, which are available online at The current notifications of changes in voting rights in accordance with the Wertpapierhandelsgesetz (WpHG German Securities Trading Act) are also published on this website. COMPOSITION OF THE SUPERVISORY BOARD The Supervisory Board consists of 20 members, half of whom are shareholder representatives. In accordance with Article 11(1) of the Articles of Association of Volkswagen AG, the State of Lower Saxony is entitled to appoint two of these shareholder representatives for as long as it directly or indirectly holds at least 15% of the Company s ordinary shares. The remaining shareholder representatives on the Supervisory Board are elected by the Annual General Meeting. The other half of the Supervisory Board consists of employee representatives elected by the employees in accordance with the Mitbestimmungsgesetz (MitbestG German Codetermination Act). A total of seven of these employee representatives are Company employees elected by the workforce; the other three employee representatives are trade union representatives elected by the workforce. The Chairman of the Supervisory Board is generally a shareholder representative elected by the other members of the Supervisory Board. In the event that a Supervisory Board vote is tied, the Chairman of the Supervisory Board has a casting vote in accordance with the MitbestG. The goals for the composition of the Supervisory Board are described on page 61 of the Corporate Governance Report. Information about the composition of the Supervisory Board at the end of the reporting period can be found on pages 85 to 87 of this annual report. STATUTORY REQUIREMENTS AND REQUIREMENTS OF THE ARTICLES OF ASSOCIATION WITH REGARD TO THE APPOINTMENT AND REMOVAL OF BOARD OF MANAGEMENT MEMBERS AND TO AMENDMENTS TO THE ARTICLES OF ASSOCIATION The appointment and removal of members of the Board of Management are governed by sections 84 and 85 of the AktG, which specify that members of the Board of Management are appointed by the Supervisory Board for a maximum of five years. Board of Management members may be reappointed or have their term of office extended for a maximum of five years in each case. In addition, Article 6 of the Articles of Association of Volkswagen AG states that the number of Board of Management members is stipulated by the Supervisory Board and that the Board of Management must consist of at least three persons. The Annual General Meeting resolves amendments to the Articles of Association (section 119(1) of the AktG). In accordance with section 4(3) of the VW-Gesetz as amended on July 30, 2009 and Article 25(2) of the Articles of Association of Volkswagen AG, Annual General Meeting resolutions to amend the Articles of Association require a majority of more than four-fifths of the share capital represented. POWERS OF THE BOARD OF MANAGEMENT, IN PARTICULAR CONCERNING THE ISSUE OF NEW SHARES AND THE REPURCHASE OF TREASURY SHARES According to German stock corporation law, the Annual General Meeting can authorize the Board of Management, for a maximum period of five years, to issue new shares. It can also authorize the Board of Management, for a maximum period of five years, to issue bonds on the basis of which new shares are to be issued. The Annual General Meeting also decides the extent to which shareholders have preemptive rights to the new shares or bonds. The maximum amount of authorized share capital or contingent capital available for these purposes is determined by Article 4 of the Articles of Association of Volkswagen AG, as amended.

94 90 Disclosures Required Under Takeover Law Group Management Report The Annual General Meeting on April 19, 2012 resolved to authorize the Board of Management, with the consent of the Supervisory Board, to increase the Company s share capital by a total of up to million (corresponding to approximately 43 million shares) on one or more occasions up to April 18, 2017 by issuing new ordinary and/or nonvoting preferred bearer shares including with shareholders preemptive rights disapplied against cash and/or noncash contributions. This authorization was partially exercised in June 2014 by way of a capital increase through the issuance of 10,471,204 new preferred shares from authorized capital against cash contributions, while disapplying shareholders preemptive rights. This increased the share capital by 26.8 million and generated gross proceeds of 2.0 billion. At the Annual General Meeting on May 5, 2015, a resolution was passed authorizing the Board of Management, with the consent of the Supervisory Board, to increase the Company s share capital by a total of up to million (corresponding to 70 million shares) on one or more occasions up to May 4, 2020 by issuing new nonvoting preferred shares against cash contributions. Further details of the authorization to issue new shares and their permitted uses may be found in the notes to the consolidated financial statements on page 256. Opportunities to acquire treasury shares are governed by section 71 of the AktG. The Board of Management was most recently authorized to acquire treasury shares up to a maximum of 10% of the share capital at the Annual General Meeting on April 19, This authorization applied until April 18, 2017 and has not been exercised. MATERIAL AGREEMENTS OF THE PARENT COMPANY IN THE EVENT OF A CHANGE OF CONTROL FOLLOWING A TAKEOVER BID A banking syndicate granted Volkswagen AG a syndicated line of credit amounting to 5.0 billion that runs until April The syndicate members were granted the right to call their portion of the syndicated line of credit if Volkswagen AG is merged with a third party or becomes a subsidiary of another company. However, this call right does not apply in the event of a merger by absorption of Porsche Holding SE, one of its subsidiaries, or one of its holding companies and Volkswagen AG in which Volkswagen AG is the acquiring legal entity. In addition, Volkswagen AG agreed a supplementary syndicated line of credit of up to 20.0 billion with a banking syndicate, initially running until December 2016 and since extended until June The syndicate members were granted the right to call their portion of the syndicated line of credit if Volkswagen AG is merged with a third party or group of third parties, or becomes a subsidiary of another company or group of other companies. Exceptions to this call right were agreed with regard to various combinations involving the current majority shareholders. This line of credit was terminated in June 2017 as per the contractual agreement.

95 Group Management Report Diesel Issue 91 Diesel Issue During the fiscal year, we reached extensive settlement agreements in the USA. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. We also continued to work on resolving the diesel issue. Further special items amounting to 3.2 billion had to be accounted for in the fiscal year. IRREGULARITIES CONCERNING NO X EMISSIONS On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a Notice of Violation that irregularities in relation to nitrogen oxide (NO x ) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a Notice of Violation alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in particular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the implementation of technical measures with numerous authorities. Detailed information on the individual settlement agreements as well as on the pending court and governmental proceedings can be found in the Report on Risks and Opportunities, starting on page 178. EXTENSIVE INVESTIGATIONS INITIATED BY VOLKSWAGEN AG After the first Notice of Violation was issued, Volkswagen AG immediately initiated its own internal inquiries and an external investigation. The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volkswagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ s and the Braunschweig public prosecutor s criminal investigation as well as other investigations and proceedings which were expected at that time. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ. To resolve US-criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volkswagen AG. The Statement of Facts is based in part on Jones Day s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges against the company in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this further work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown individuals as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents.

96 92 Diesel Issue Group Management Report The diesel issue is rooted in a modification of parts of the software of the relevant engine s control unit which, according to Volkswagen AG s legal position, is only unlawful in the USA for the type EA 189 diesel engines that Volkswagen AG was developing at that time. The decision to develop and install this software function was taken in late 2006, below Board of Management level. None of the members of the Board of Management had, at that time and for many years to follow, knowledge of the development and implementation of this software function in the relevant engine control unit of the type EA 189 diesel engines. In the months after the International Council on Clean Transportation (ICCT) study was published in May 2014, the test set-ups on which the ICCT study was based were repeated in-house at Volkswagen AG and confirmed the unusually high NO x emissions from certain type EA l diesel engines in the USA. The California Air Resources Board (CARB) a part of the environmental authority of California was informed of this result, and, at the same time, an offer was made to recalibrate the type EA 189 diesel engines in the USA as part of a service measure that was already planned in the USA. This measure was evaluated and adopted by the Ausschuss für Produktsicherheit (APS Product Safety Committee), which initiates necessary and appropriate measures to ensure the safety and conformity of Volkswagen AG s products that are placed in the market. There are no findings that an unlawful defeat device under US law was disclosed to the APS as the cause of the discrepancies or to the persons responsible for preparing the 2014 annual and consolidated financial statements. Instead, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing the 2014 annual and consolidated financial statements remained under the impression that the issue could be solved with comparatively little effort as part of a service measure. In the course of the summer of 2015, however, it became successively apparent to individual members of Volkswagen AG s Board of Management that the cause of the discrepancies in the USA was a modification of parts of the software of the engine control unit, which was later identified as an unlawful defeat device as defined by US law. This culminated in the disclosure of a defeat device to EPA and CARB on September 3, According to the assessment at that time of the responsible persons dealing with the matter, the scope of the costs expected by the Volkswagen Group (recall costs, retrofitting costs and financial penalties) was not fundamentally dissimilar to that of previous cases involving other vehicle manufacturers, and, therefore, appeared to be controllable overall with a view to the business activities of the Volkswagen Group. This assessment by the Volkswagen Group was based, among other things, on the advice of a law firm engaged in the USA for approval issues, according to which similar cases in the past were resolved amicably with the US authorities. The publication of the Notice of Violation by the EPA on September 18, 2015, which, especially at that time came unexpectedly to the Board of Management, then presented the situation in an entirely different light. Extensive inquiries were also conducted at AUDI AG in relation to the potential use of unlawful defeat devices under US law in type V6 3.0 l diesel engines. The investigation conducted by Jones Day for Volkswagen AG also comprehensively covered this issue. The AUDI AG Board of Management members in office back at the relevant time have stated that they had no knowledge of the use of unlawful defeat device software under US law in V6 3.0 l TDI engines until they were informed by the EPA in November Within the Volkswagen Group, Volkswagen AG has development responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development responsibility for the six-cylinder diesel engines such as the type V6 3.0 l diesel engines. Nothing from the publications made up to the time this report was prepared or from the ongoing investigations and interviews on the diesel issue has presented the Volkswagen AG Board of Management with any conclusive findings or assessments of fact that would result in a different assessment of the associated risks (e.g. investor lawsuits). EA 189 VEHICLES IN THE EU/REST OF THE WORLD Outside the USA and Canada, around 10 million vehicles with type EA 189 diesel engines were affected. During the first quarter of 2017, the Kraftfahrt-Bundesamt (KBA German Federal Motor Transport Authority) issued the final outstanding official approvals needed for technical measures of 14 thousand Volkswagen Group vehicles fitted with type EA 189 diesel engines falling within its remit. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO 2 emissions figures, engine power, maximum torque and noise emissions. Once the updates have been made, the vehicles will continue to comply with the legal requirements and the emission standards applicable in each case.

97 Group Management Report Diesel Issue 93 During the second quarter of 2017, the Vehicle Certification Agency in the United Kingdom issued the outstanding official approvals needed for technical measures to modify the ŠKODA and SEAT models with type EA 189 diesel engines falling within its remit. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. In some countries outside the EU the technical measures have to be approved by the national authorities. With the exception of South Korea and Chile, we were able to complete the approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals Volkswagen is in close contact with the authorities. Based on current planning, implementation of the technical measures, which are free of charge for our customers, will run into FURTHER RETROFIT PROGRAMS FOR TYPE V6/V8 ENGINES For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. A systematic review process for all engine and gear variants has been underway since This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. In this context, AUDI AG announced on July 21, 2017 that it was going to improve the emissions performance of up to 850 thousand vehicles across Europe via service measures. The retrofit package comprises voluntary measures and to a small extent measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. AFFECTED VEHICLES IN THE USA/CANADA In the USA and Canada three generations of certain vehicles with 2.0 l TDI engines and two generations of certain vehicles with V6 3.0 l TDI engines are affected, which come to a total of approximately 700 thousand vehicles. Due to NO x limits that are considerably stricter than in the EU and the rest of the world, it is a greater technical challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. The EPA and CARB have approved emissions modifications and issued resale approvals for the majority of the affected vehicles with 2.0 l TDI engines. The approved modifications relate to certain Generation 1 and Generation 2 vehicles, and the first part of a two-step modification for Generation 3 vehicles. The second part of this modification has been submitted for approval. We are working in close cooperation with the EPA and CARB to obtain the outstanding approval. We have withdrawn the emissions modification proposal for Generation 2 vehicles with manual transmissions. The EPA and CARB have approved the modification measures for the Generation 2 vehicles with type V6 3.0 l TDI engines. We have submitted proposals for emissions modifications for Generation 1 vehicles with type V6 3.0 l TDI engines. These proposals are under review by the EPA and CARB. The relevant US and Canadian companies of the Volkswagen Group have withdrawn the affected new and certified used vehicles from sale until the outstanding approvals are issued. The technical solutions that have been approved by the authorities have already been implemented. LEGAL RISKS Various legal risks are associated with the diesel issue. The provisions recognized for the diesel issue and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the facts have not yet been definitively clarified. Should these legal risks materialize, this could result in considerable financial charges. A detailed description of these and other risks arising from the diesel issue as stated above can be found in the Report on Risks and Opportunities starting on page 178. OPERATING RESULT Special items recognized in operating profit relating to the diesel issue amounted to 3.2 ( 6.4) billion in fiscal year 2017, mainly due to higher provisions relating to the buyback/retrofit programs. The diesel issue led to total special items of 25.8 billion in the years 2015 to 2017.

98 94 Diesel Issue Group Management Report INDEPENDENT MONITOR In June 2017, Larry D. Thompson was appointed as the Independent Compliance Monitor at Volkswagen under the terms of the Plea Agreement with the DOJ announced on January 11, 2017 and confirmed by a US federal court on April 21, He will also work as Independent Compliance Auditor under the Third Partial Consent Decree concluded separately with the EPA and the Third California Partial Consent Decree agreed with the State of California and CARB (for more information on these agreements, please see the Litigation section starting on page 178). Mr. Thompson will assess and oversee Volkswagen s compliance with the terms of the Plea Agreement and Consent Decrees for a period of three years, which includes taking measures to further strengthen the Company s compliance, reporting and monitoring mechanisms and the implementation of an enhanced compliance and ethics program. TO OUR STAKEHOLDERS The diesel issue prompted a process by which we strengthened our corporate culture, particularly in the areas of compliance and internal control mechanisms. This development led to the initiation of programs and projects designed to intensify Volkswagen s collective awareness of integrity. We honed our internal control systems for the product development process and vehicle testing, overhauled our Code of Conduct and the whistleblower system, and increased the frequency of the training courses provided to staff on these topics. The combination of integrity, compliance and culture is an important and indispensable part of the transformation process we are undergoing. We are renewing ourselves from the inside out and are evolving on a daily basis to merit our most important asset the trust of our customers and stakeholders.

99 Group Management Report Business Development 95 Business Development The global economy grew more strongly in fiscal year 2017 than in the previous year. However, global demand for vehicles did not rise as sharply as in the year before. Amid challenging market conditions, the Volkswagen Group delivered 10.7 million vehicles to customers for the first time. DEVELOPMENTS IN THE GLOBAL ECONOMY Global gross domestic product (GDP) rose by 3.2 (2.5)% in Economic momentum accelerated in both advanced economies and emerging markets year-on-year. Consumer prices increased at a slower pace worldwide than in the previous year, with persistently low interest rates and rising energy and commodity prices. Europe/Other Markets GDP growth in Western Europe edged up slightly during the year to 2.3 (1.8)%, with the majority of the countries in this region seeing higher growth rates. The start of the Brexit negotiations between the United Kingdom and the European Union generated uncertainty, as did the question of what form this relationship would take in the future. The unemployment rate in the eurozone continued to decrease, falling to an average of 9.6 (10.6)%, though rates remained considerably higher in Greece and Spain. The Central and Eastern Europe region recorded a relatively strong increase in GDP in the reporting period with an increase of 3.8 (1.8)%. In Central Europe, the general uptrend gained traction, and in Eastern Europe the economy also grew at a considerably stronger pace than in the previous year. Higher energy prices led to a stabilization of the economic situation in the countries from this region that export raw materials. A growth rate of 1.6 ( 0.4)% marked the end of the recessionary period in Russia. South Africa s GDP rose by just 0.9 (0.3)%, only slightly higher than the low figure for the previous year. Ongoing structural deficits, social unrest and political challenges weighed on the economy. Germany The German economy continued to profit from optimistic consumer sentiment and a good labor market, which led to a sharper year-on-year increase in GDP to 2.5 (1.9)% in North America Economic growth in the USA was faster than in the previous year, at 2.2 (1.5)%. The economy was supported mainly by private consumption and the expansionary monetary policy. Private gross investments also developed positively. The average unemployment rate was 4.4 (4.9)%. The US dollar was somewhat weaker than in the previous year. At 3.0 (1.4)%, GDP growth in Canada accelerated significantly. The growth rate of Mexico s economic output fell somewhat to 2.2 (2.7)%. South America In the reporting period, Brazil left behind the economic downswing, with economic output increasing by 1.0 ( 3.5)%. The situation in South America s largest economy nevertheless remained tense, due to political uncertainty, among other things. Argentina s GDP rose by 2.8 ( 2.2)% in spite of structural deficits and persistently high inflation. Asia-Pacific The Chinese economy expanded at the previous year s high level with a growth rate of 6.9 (6.7)%. The Indian economy continued its positive trend but, with a gain of 6.5 (7.1)%, grew somewhat less strongly than in the previous year. The Introduction of reform measures had a temporary dampening effect here. Japan registered solid GDP growth of 1.8 (0.9)%.

100 96 Business Development Group Management Report ECONOMIC GROWTH Percentage change in GDP 9 Global economy Global Western economy Europe Western Germany Europe Germany USA China USA China TRENDS IN THE PASSENGER CAR MARKETS In fiscal year 2017, the global market volume of passenger cars rose by 2.9% to 83.5 million vehicles, achieving a record figure for the seventh time in a row. While demand rose in the Asia-Pacific, South America, Western Europe and Central and Eastern Europe regions, the market volume in North America, the Middle East and Africa fell short of the prioryear figures. Sector-specific environment The sector-specific environment was influenced significantly by fiscal policy measures, which contributed substantially to the mixed trends in sales volumes in the markets last year. The instruments used were tax cuts or increases, incentive programs and sales incentives, as well as import duties. In addition, non-tariff trade barriers to protect the respective domestic automotive industry made the movement of vehicles, parts and components more difficult. Europe/Other Markets In Western Europe, new passenger car registrations rose by 2.5% to 14.3 million vehicles, the highest level in the past ten years. The positive performance was underpinned in particular by the strong macroeconomic environment, consumer confidence and low interest rates. In Italy (+8.1%) and Spain (+7.7%), the level of demand benefited from demand for replacement vehicles and particularly from significant growth in sales to commercial customers. The rate of growth in the French passenger car market was lower, at 4.8%. In the United Kingdom, the volume of demand fell 5.7% short of the record level seen in the previous year due among other things to the change in vehicle taxation as of April 1, The number of diesel vehicles (passenger cars) in Western Europe slipped to 44.4 (49.5)% in the reporting year. The passenger car market volume in the Central and Eastern European region in fiscal year 2017 was up considerably on the prior-year figure, with an increase of 12.6% to 3.0 million vehicles. New passenger car registrations in the EU member states of Central Europe increased by 12.5% to 1.3 million units. Passenger car sales in Eastern Europe also achieved a double-digit growth rate (+12.6%), starting from a very low level. The main growth driver in the region was the Russian market, which, with an increase of 12.3% to 1.5 million vehicles, saw demand increase again for the first time after four years of decline. At a rate of change of 2.4%, the number of new passenger cars registered in South Africa in the reporting period (370 thousand vehicles) was slightly higher than the comparatively low level seen the previous year. Despite the weak overall economic environment, incentive programs and lower interest rates were the principal causes of this increase.

101 Group Management Report Business Development 97 EXCHANGE RATE MOVEMENTS FROM DECEMBER 2016 TO DECEMBER 2017 Index based on month-end prices: as of December 31, 2016 = EUR to GBP EUR to USD EUR to CNY EUR to JPY D J F M A M J J A S O N D Germany In fiscal year 2017, demand for passenger cars in Germany exceeded the prior-year figure by 2.7% at 3.4 million units. The fact that this was the highest level since 2009 was attributable not only to the buoyant macroeconomic environment but also to manufacturer discounts in the form of a trade-in bonus for older diesel models as well as to an environmental bonus for electric-powered vehicles (all-electric and plug-in hybrid drives). New registrations for both retail customers (+4.4%) and business customers (+1.7%) increased as a result. However, domestic production and exports fell short of the comparable prior-year figures in Passenger car production declined by 1.7% to 5.6 million vehicles. Passenger car exports fell by 0.9% to 4.4 million vehicles; this was mainly due to the fact that the volume of exports to North America was significantly lower because of shifts in production accompanied by a weakening of the North American market. North America At 20.8 million vehicles ( 1.4%) in fiscal year 2017, sales of passenger cars and light commercial vehicles (up to 6.35 tonnes) in the North America region were just under the record level seen in the previous year. In the US market, demand diminished compared with the high level in 2016 by 1.8% to 17.2 million units. A favorable labor market, high consumer confidence and generous manufacturer incentive programs were unable to stop the downward tendency. The trend in demand towards SUV and pickup models (+5.7%) continued, accompanied by a simultaneous decline in sales of traditional passenger cars ( 10.9%). The Canadian automotive market again recorded growth (+4.6% to 2.0 million vehicles), exceeding the record figure of the previous year. By contrast, sales of passenger cars and light commercial vehicles in Mexico were down on the record volumes achieved in the prior-year period ( 4.6% to 1.5 million units). South America In South America, demand for passenger cars and light commercial vehicles rose from the previously low level by a significant 12.6% to 4.2 million units in the reporting period. After four years of declining new vehicle registrations, growth of 9.4% to 2.2 million vehicles was recorded again for the first time in the Brazilian automotive market. However, the market volume was still around a quarter lower than the average for the last ten years. Brazil s vehicle exports saw a marked increase in 2017, climbing 46.5% to 762 thousand units to exceed the all-time high recorded in Exports benefited in particular from the dynamic development of the market in Argentina, where demand increased by 26.2% year-on-year to 855 thousand passenger cars and light commercial vehicles. The second-highest number of new registrations in the region's history was primarily driven by price reductions and attractive financing models offered by the manufacturers.

102 98 Business Development Group Management Report Asia-Pacific The market volume in the Asia-Pacific region rose by 4.7% in the past fiscal year to 37.0 million units; this was the highest absolute increase in new vehicle registrations worldwide. Once again, the main growth driver was the Chinese passenger car market, although the growth rate was low compared with previous years, with an increase of 4.5% to 23.9 million vehicles. This was mainly because customers brought forward purchases at the end of 2016 in anticipation of a rise in the tax rate on vehicles of up to 1.6 l at the beginning of The number of passenger cars sold in India grew 9.3% year-on-year to 3.1 million units, topping the 3 million mark for the first time ever. This was due not only to high consumer confidence, a wealth of new models and attractive financing products, but especially to the goods and services tax introduced on July 1, 2017, which resulted in part in improved purchasing conditions for the consumer. The Japanese passenger car market showed a substantial improvement over the low prior-year level with sales of 4.4 million vehicles in the reporting period (+6.1%). The main reasons for the positive trend were the market success of new models and the continued government support for fuelefficient, low-emission vehicles. TRENDS IN THE MARKETS FOR COMMERCIAL VEHICLES Overall demand for light commercial vehicles in fiscal year 2017 was slightly lower than in the previous year. A total of 9.1 (9.3) million vehicles were registered worldwide. In Western Europe, the number of new vehicle registrations rose by 4.7% during the year to 1.9 million units, driven by the region s continued positive economic performance. The markets in Italy, France and Spain recorded moderate to high growth rates, while the United Kingdom registered a decline. In Germany, the comparative figure for 2016 was exceeded by 3.6%. Central and Eastern European markets recorded perceptible growth on the whole with 326 (306) thousand vehicle registrations. In Russia alone, 123 (116) thousand light commercial vehicles were registered. There, market performance benefited from the ruble s recovery and the drop in inflation. Most of the markets in this region succeeded in maintaining or exceeding their prior-year results. In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. Registration volumes of light commercial vehicles in the Asia-Pacific region decreased to 6.0 million units in the reporting period ( 3.1%). In China, the region s dominant market, demand for light commercial vehicles of 3.4 million units was down a substantial 8.2% on the prior-year figure. This decline is mainly due to the shift in demand for micro vans towards more cost-effective MPVs and SUVs. As a consequence of the sustained economic growth in India, considerably more vehicles were registered than in 2016; here, 560 (510) thousand new units were registered. The market volume fell in Japan as a result of the persistently weak economic trend ( 5.0%). Global demand for mid-sized and heavy trucks with a gross weight of more than six tonnes in the markets that are relevant for the Volkswagen Group was higher in fiscal year 2017 than in the previous year, with 547 thousand new vehicle registrations (+7.4%). In Western Europe, the number of new truck registrations remained level with the previous year at a total of 289 thousand vehicles. While the market in Spain remained at the previous year s level, in Italy it expanded. Demand in the United Kingdom and the Netherlands declined. New registrations in Germany, Western Europe s largest market, were on a level with the previous year. Central and Eastern Europe saw demand rise by 17.7% to 153 thousand units on the back of the positive economic performance. This growth was attributable to the Russian market; here, registrations moved up 47.7% from a low prioryear level to 72 thousand vehicles. Reasons for this were the incipient recovery of the economy, declining inflation rates and demand for replacement vehicles. South America saw a significant increase in market volume compared with the previous year. Here, the number of new vehicle registrations rose by 11.8% to 105 thousand units. In Brazil, the region s largest market, demand for trucks was up 2.9% on the low prior-year figure. This reflected a recovery of the market once the difficult economic climate improved. There was a very sharp increase in new vehicle registrations in Argentina (+78,7%), buoyed by the political reforms and stimulus from the agricultural sector. Demand for buses in the markets that are relevant for the Volkswagen Group was considerably higher than in the previous year. The markets in Central and Eastern Europe as well as South America contributed in particular to this growth. TRENDS IN THE MARKETS FOR POWER ENGINEERING The markets for power engineering are subject to differing regional and economic factors. Consequently, their business growth trends are generally independent of each other. The number of orders for merchant vessels remained very low in the first half of Construction of new bulk carriers and container ships in particular fell short of expectations on account of overall low freight rates. In the second

103 Group Management Report Business Development 99 half of 2017, however, the market volume in merchant shipping stood at a higher level overall and a slightly positive trend in new orders for ships became apparent. Yet, despite the ongoing recovery in oil prices, existing overcapacity in the offshore sector continued to curb investment in oil production. As a result, new ship construction came to a virtual standstill here. By contrast, a stable uptrend was again recorded in demand for cruise ships, ferries, fishing vessels and dredgers. The special market for government vessels also continued on a positive trajectory. In spite of the still low liquid fuel prices, the somewhat positive trend towards gaspowered ships stabilized in expectation of stricter emission standards. As a whole, the marine market showed slight growth at a low level in 2017 compared with the previous year. China, South Korea and Japan remained the dominant shipbuilding countries, accounting for a global market share of more than 75% measured in terms of the number of ships. On account of low market volumes, all market segments are seeing considerable competition and a sharp drop in prices as a result. Demand for energy solutions in emerging economies increased slightly once again in The Middle East, Southeast Asia, Africa and South America regions continue to be relevant markets for energy solutions. Particularly on larger projects, order placement is being delayed due to ongoing muted growth in key emerging markets and persistently difficult financing conditions for customers. Overall, there was a slight year-on-year increase in demand for decentralized diesel and gas engine power plants in The shift away from oil-fired power plants towards dual-fuel and gasfired power plants intensified further. Nevertheless, nearly all projects continue to be subject to intense competition and pressure on prices, which has a negative impact on the earnings quality of orders. The market for the construction of turbomachinery is mainly dominated by investment projects in oil and gas, the processing industry and power generation. In spite of a modest recovery, oil prices remained low on the whole in As a result, leading oil and gas companies kept capital expenditure at a low level. Planned projects were postponed again or canceled. Demand for products from the processing industry and power generation remained generally weak in Failure to reduce overcapacity in some industries, such as steel-making, prevented any recovery in the corresponding markets. Insufficient capacity utilization at many manufacturers intensified the level of competition. Overall, the market volume for turbomachinery in the reporting period was marginally higher than in the prior-year period. Competition and pressure on prices remain fierce. The marine and power plant after-sales business for diesel engines generally performed positively and benefited from a continued increase in interest in long-term maintenance contracts and retrofit solutions. The after-sales market for turbomachinery showed a slight uptrend. TRENDS IN THE MARKET FOR FINANCIAL SERVICES Demand for automotive financial services was high once again in 2017, due above all to the expansion of the overall market for passenger cars and low key interest rates in the main currency areas. Particularly insurance and service products such as maintenance and servicing agreements were especially popular, as customers in more advanced automotive financial services markets are putting greater focus on optimizing overall running costs. In the fleet segment, some customers consulted automotive financial service providers in order to optimise their entire mobility management beyond mere fleet operation. There was also increased demand from both private and business customers for mobility services centered on vehicle usage rather than ownership. In Europe, sales of financial services climbed further in the reporting period, strengthened by higher vehicle sales and demand for after-sales products such as servicing, maintenance and spare parts agreements as well as automotiverelated insurance. Demand developed positively in most countries; in the United Kingdom, France, Spain and Italy in particular, automotive financial services products continued to enjoy rising popularity. The UK s decision to leave the EU has not yet had a negative impact on local demand for financial services. In Germany, the share of loan-financed or leased vehicles remained stable at a high level in Alongside traditional products, mobility services and after-sales products were particularly popular. In South Africa, structural deficits and political uncertainty curbed economic growth, which also impacted on the automotive industry. Demand for automotive financial services products remained stable. Sales of automotive financial services in North America remained at a high level in the fiscal year now ended. In the USA, the overall market for financial services products once again performed positively. In particular, demand for leasing through captive financial service providers was consistently high. In Mexico, demand for automotive financial services products continued at a high level.

104 100 Business Development Group Management Report The macroeconomic and political situation in Brazil remained tense in 2017 and had a negative impact on the consumer credit business for new vehicles as well as on sales of the country-specific financial services product Consorcio, a lottery-style savings plan. The negative trend tapered off slightly in the second half of the year, however. Argentina s automotive industry was helped in 2017 by price reductions and attractive financing models from manufacturers. The above-average demand for vehicles was the basis for a good year for automotive financial services. The performance of markets in the Asia-Pacific region during the reporting period was mixed. In China, the proportion of loan-financed vehicle purchases rose. Despite increasing restrictions on registrations in metropolitan areas, there is still considerable potential to acquire new customers for automotive-related financial services, particularly in the interior of the country. Demand for automotive financial services in Japan and Korea was stable on the whole. In Australia, the central bank s continued policy of low interest rates stimulated demand for automotive-related financial services and service contracts. In the commercial vehicles segment, the European market for financial services again performed positively; demand also rose in China. The tense economic situation in Brazil once again put pressure on the truck and bus business and the related financial services market, though this negative trend weakened somewhat in the second half of the year. NEW GROUP MODELS IN 2017 The Volkswagen Group launched a large number of attractive new models on the market in fiscal year The current product portfolio comprises 355 models. It covers almost all key segments and body types, with offerings from small cars to super sports cars in the passenger car segment, and from pickups to heavy trucks and buses in the commercial vehicles segment, as well as motorcycles. The Volkswagen Passenger Cars brand kicked off its global product initiative in 2017, starting with the new Golf. The updated bestseller not only features improved design and new engines, but also a large number of new digital driver assistance systems and an innovative infotainment system. The range of the all-electric e-golf was extended to 300 km. The Arteon, the brand s new top-of-the-range saloon, celebrated its world premiere. The elegant and dynamic five-door vehicle with the proportions of a Gran Turismo and coupé lines is impressively spacious and comfortable. The new Polo, which is now based on the Modular Transverse Toolkit (MQB) too, brings technological innovations to the small car segment that were previously available only in higher vehicle classes. The Polo is ushering in a new era in Brazil, where it is setting new standards in terms of quality, driving dynamics and digital innovations. In 2017, Volkswagen Passenger Cars substantially expanded its range of vehicles in the SUV seg- ment. The new T-Roc is a young, sporty crossover model with which the brand hopes to kindle enthusiasm among new groups of customers. A long version of the Tiguan, the successful compact SUV, was also launched on the market. This version is available in Europe as the Tiguan Allspace as well as in China and the USA. Of the large SUVs, the Teramont came on the market in China and the Atlas in the USA. This means that the brand is now represented in four of the five largest vehicle segments in the USA. The Audi brand launched the new Q5 in The sporty, progressive A5 family was also supplemented by the revamped A5 Sportback and A5 Cabriolet. At the same time, Audi expanded its range of environmentally friendly models with the A4 Avant g-tron and A5 Sportback g-tron. The brand s flagship, the new Audi A8, was developed as the world s first production model designed for highly automated driving. With a new design language, an innovative touch control interface and systematic electrification of the drive, the A8 is once again a reflection of the slogan Vorsprung durch Technik. Audi also launched its fastest open-top production model, the R8 Spyder V10 plus, on the market. In China, the locally built Audi A3 was revamped. ŠKODA began its SUV drive in 2017: the self-confident, powerful Kodiaq, which is based on the MQB platform, has carved out a new segment for the brand. It features all of the brand s strengths: sophisticated functionality, effortless spaciousness, cutting-edge technology and outstanding value for money. The compact SUV Karoq followed during the year. The completely redeveloped model stands out from the crowd thanks to its emotional and dynamic design as well as a wealth of innovations. The popular Octavia received an upgrade. The Citigo, the Rapid and the Rapid Spaceback were also given a face-lift. The SEAT brand continued its major product initiative in the reporting period with the revitalized Leon. The fifth generation of the Ibiza also came onto the market. SEAT made its debut in the crossover segment with the Arona. The Ateca s younger brother combines the special merits of a compact city car with the robust features of an SUV. In 2017, Porsche supplemented the second generation of the Panamera by adding several model variants, including the Panamera 4 E-Hybrid and Panamera Turbo S E-Hybrid, the Executive models and the Sport Turismo. In the 911 model series, Porsche launched the GTS models, the new 911 GT3 and the 911 GT2 RS the sporty vanguard of the model series. Porsche also celebrated the world premiere of the new Cayenne. The successful model, which has been redeveloped from the ground up, combines more than ever before the performance typical of a Porsche with utmost everyday practicality. In 2017, Bentley rolled out the Bentayga Diesel, the first of the brand s models with a diesel engine and also the world s

105 Group Management Report Business Development 101 fastest diesel SUV. The Continental GT Supersports also celebrated its market debut. Lamborghini launched the new Huracán RWD Spyder on the market and the Huracán Performante, along with the upgraded Aventador in the versions S Coupé and S Roadster. Bugatti began 2017 with deliveries of the 1,500 PS super sports car Chiron, which is limited to 500 vehicles. In the reporting period, the Volkswagen Commercial Vehicles brand launched the fully re-engineered Crafter on the market, which has been designed systematically with a strong focus on customer needs. Scania presented a new generation of trucks for the construction and forestry industries, new engines and cabs as well as new services. With the latest generation of Euro 6 V8 engines, Scania is setting new standards in terms of fuel efficiency. MAN entered the world of vans for the first time in 2017 with the TGE. In the bus segment, the new Lion s Coach celebrated its premiere. This marks the beginning of a new design language for buses. In the high-performance diesel engine segment, MAN Power Engineering presented the successor to the 48/60CR, the latest addition to its 4x line. Ducati rolled out a total of seven new models in 2017: the Ducati SuperSport, the Monster 797 and 1200, the Multistrada 950, two new Scrambler models and the limited 1299 Superleggera. VOLKSWAGEN GROUP DELIVERIES In fiscal year 2017, the Volkswagen Group increased its deliveries to customers worldwide by 4.3% year-on-year and once again achieved a new record of 10,741,455 vehicles. The chart on the next page shows how deliveries changed from month to month and compares each monthly figure to the same month of the previous year. Deliveries of passenger cars and commercial vehicles are reported separately in the following. VOLKSWAGEN GROUP DELIVERIES % Passenger Cars 10,038,650 9,635, Commercial Vehicles 702, , Total 10,741,455 10,297, PASSENGER CAR DELIVERIES WORLDWIDE With its passenger car brands, the Volkswagen Group is present in all relevant automotive markets around the world. The Group s key sales markets currently include Western Europe, China, the USA, Brazil and Mexico. The Group recorded encouraging growth in many key markets. During the reporting period, deliveries of passenger cars to Volkswagen Group customers worldwide rose to 10,038,650 units amid partly difficult conditions in some relevant markets such as the United Kingdom and the USA. This was an increase of 403,164 vehicles or 4.2% on the previous year. Since the passenger car market as a whole expanded by 2.9% in the same period, the Volkswagen Group s share of the global market rose slightly to 12.1 (11.9)%. The Group recorded the highest absolute growth in China. Sales figures in Germany and Mexico, among others, were down on the previous year. All Volkswagen Group brands lifted delivery volumes year-on-year. The Volkswagen Passenger Cars brand recorded the strongest growth in absolute terms, setting new records, as did Audi, ŠKODA, Porsche, Bentley and Lamborghini. The table on page 104 gives an overview of passenger car deliveries to customers of the Volkswagen Group in the regions and the key individual markets. The demand trends for Group models in these markets and regions are described in the following sections. Deliveries in Europe/Other markets In 2017, the passenger car market as a whole expanded by 2.5% in Western Europe. Deliveries to customers of the Volkswagen Group there rose less pronouncedly, by 1.4% to 3,157,107 vehicles. Among other factors, this trend was due to the Golf and Polo model change, the fact that customer confidence has not yet been fully restored following the diesel issue and to customer uncertainty generated by the public discussion on driving bans for diesel vehicles. However, demand for Group models was up year-on-year in virtually all major markets in this region, with the Tiguan, Audi Q2 and SEAT Ateca models seeing the highest increases. The Audi A5 Sportback and Porsche Macan models were also very popular. The new Polo, T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the ŠKODA Karoq and Kodiaq, and the SEAT Arona and Ibiza were very well received by the market. The Group s share of the passenger car market in Western Europe was 22.0 (22.3)%. 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures.

106 102 Business Development Group Management Report VOLKSWAGEN GROUP DELIVERIES BY MONTH Vehicles in thousands 1, , J F M A M J J A S O N D In the Central and Eastern Europe regions, where passenger car markets have grown considerably, the Volkswagen Group delivered 12.9% more vehicles to customers in the reporting period than in the previous year. The Czech Republic and Poland continued to see strong growth in demand for Group models, and in Russia we also registered a marked upsurge in unit sales. Demand for the Golf, Tiguan, Audi Q2, ŠKODA Fabia, ŠKODA Rapid and ŠKODA Octavia models was very encouraging. In addition, the new ŠKODA Karoq and Kodiaq models and the SEAT Ateca models were exceedingly popular. The Volkswagen Group s share of the passenger car market in Central and Eastern Europe improved slightly to 22.1 (22.0)%. In South Africa, demand for Volkswagen Group vehicles in 2017 increased by 1.4% compared with the previous year. The passenger car market as a whole grew by 2.4% in the same period. The best-selling Group model in South Africa was the Polo. In the markets of the Middle East region, which are seeing a modest decline, we sold 6.6% fewer vehicles in the past fiscal year than in the year before. The Polo, Golf, Passat and ŠKODA Octavia models saw the highest demand. Deliveries in Germany The German passenger car market continued its growth in fiscal year 2017, expanding by 2.7%. The Volkswagen Group delivered 1,131,414 passenger cars to customers in its home market, a slight decrease on the prior-year level ( 0.5%). This was due in particular to the fact that customer confidence has not yet been fully restored following the diesel issue as well as to customer uncertainty generated by the public discussion on driving bans for diesel vehicles. The Tiguan, Audi Q2, Audi A4 Avant, Audi A5 Sportback and SEAT Ateca models saw the strongest growth in demand. The new T-Roc, Tiguan Allspace and Arteon models from the Volkswagen Passenger Cars brand, the new ŠKODA Karoq and Kodiaq models, the new SEAT Arona and Ibiza models and the Porsche Macan were also very popular. In the registration statistics of the Kraftfahrt-Bundesamt (KBA German Federal Motor Transport Authority), seven Group models led their respective segments at the end of 2017: the up!, Polo, Golf, Tiguan, Touran, Passat, and Porsche 911. The Golf continued to top the list of the most popular passenger cars in Germany in terms of registrations. Deliveries in North America The Volkswagen Group handed over 962,980 vehicles to customers in North America during the reporting period in a slightly declining overall market for passenger cars and light commercial vehicles. This was 3.8% more than in the previous year. The Group s market share was 4.7 (4.4)%. The Jetta remained the Group s best-selling model in North America. In the US market, demand for Volkswagen Group models rose by 5.8% compared with the previous year. The market as a whole declined by 1.8% in this period. Models in the SUV and pickup segments remained particularly popular. The Golf Estate, Audi A5, Audi Q5, Audi Q7 and Porsche Macan models enjoyed an encouraging rise in demand. The new SUV Atlas, the Tiguan Allspace from the Volkswagen Passenger Cars brand and the Audi A5 Sportback were well received by the market.

107 Group Management Report Business Development 103 WORLDWIDE DELIVERIES OF THE GROUP S MOST SUCCESSFUL GROUP MODEL RANGE IN 2017 Vehicles in thousands Golf Jetta Tiguan Polo Passat Lavida ŠKODA Octavia Audi A In Canada, we delivered 16.6% more vehicles to customers in the reporting period than in the previous year in a growing overall market. Demand for the Golf Estate, Audi A4, Audi Q5 and Porsche Macan models developed particularly encouragingly. The new SUV Atlas and Tiguan with extended wheelbase were also very popular. In the Mexican market, which is declining on the whole, the Group s sales fell by 6.4% compared with the previous year. The Vento, Jetta, Gol and SEAT Ibiza models were particularly popular. Deliveries in South America The markets for passenger cars and light commercial vehicles in South America witnessed a clear surge in demand in 2017 (+12.6%). In this region, the Volkswagen Group handed over 445,636 vehicles to customers, an increase of 23.0% on the weak previous year. The Volkswagen Group s share of the passenger car market in this region rose to 11.5 (10.5)%. The Brazilian market also recovered in the reporting period. We delivered 17.7% more vehicles to customers there than in the previous year. The Gol, Voyage and Saveiro models saw the highest increases. Demand was also strong for the new Polo. Group sales were up 35.7% year-on-year in Argentina. The market as a whole grew at a somewhat weaker pace at 26.2%. The Gol was the best-selling vehicle in Argentina. The Suran and Amarok models were also very popular. Deliveries in the Asia-Pacific region The passenger car markets in the Asia-Pacific region experienced the largest growth in absolute terms of any world region again in Demand for Volkswagen Group models rose in this region by 4.2% year-on-year to 4,462,387 units. The market share in this region was unchanged at 12.1 (12.1)%. China, the world s largest single market, was again the main growth driver of the Asia-Pacific region in the reporting year, recording the highest absolute increase. Above all, there was continued strong demand for attractively priced entrylevel models in the SUV segment. Deliveries to customers of the Volkswagen Group in China exceeded the prior-year figure by 5.0%. The successfully concluded negotiations by the Audi brand for the strategic further development of its business in China contributed to this positive result in the second half of the year. The Bora, Magotan and Passat models recorded encouraging growth rates. Demand was likewise high for the new Phideon, the Audi A4 and the Porsche Cayenne. The new C-Trek, the new version of the Tiguan with extended wheelbase, and the new ŠKODA Octavia Combi were successfully launched on the market, as were new SUV Teramont and the ŠKODA Kodiaq. The Indian passenger car market grew further during the reporting year. The Volkswagen Group delivered 9.7% more vehicles to customers there in this period than in the previous year. The most popular Group model in India was the Polo; the new Ameo from the Volkswagen Passenger Cars brand and the ŠKODA Rapid were also very popular. Passenger car deliveries to the Group s customers in Japan in the past fiscal year exceeded the prior-year figure by 2.1%. The total market volume grew at a somewhat stronger pace in the same period. The Polo, Golf and Audi A3 were the most sought-after Group models.

108 104 Business Development Group Management Report PASSENGER CAR DELIVERIES TO CUSTOMERS BY MARKET 1 DELIVERIES (UNITS) CHANGE (%) Europe/Other markets 4,167,647 4,062, Western Europe 3,157,107 3,114, of which: Germany 1,131,414 1,136, United Kingdom 531, , Spain 270, , Italy 259, , France 256, , Central and Eastern Europe 668, , of which: Russia 173, , Poland 145, , Czech Republic 142, , Other markets 342, , of which: Turkey 158, , South Africa 79,968 78, North America 962, , of which: USA 625, , Mexico 223, , Canada 114,304 98, South America 445, , of which: Brazil 272, , Argentina 125,153 92, Asia-Pacific 4,462,387 4,282, of which: China 4,173,834 3,975, Japan 84,827 83, India 72,467 66, Worldwide 10,038,650 9,635, Volkswagen Passenger Cars 6,230,229 5,980, Audi 1,878,105 1,867, ŠKODA 1,200,535 1,126, SEAT 468, , Bentley 11,089 11, Lamborghini 3,815 3, Porsche 246, , Bugatti 71 1 x 1 Deliveries for 2016 have been updated to reflect subsequent statistical trends. The figures include the Chinese joint ventures.

109 Group Management Report Business Development 105 COMMERCIAL VEHICLE DELIVERIES The Volkswagen Group delivered a total of 702,805 commercial vehicles to customers worldwide in 2017 (+6.2%). Trucks accounted for 183,481 units (+10.7%) and buses for 19,218 units (+8.1%). Sales of light commercial vehicles increased by 4.6% year-on-year to 500,106 units. In Western Europe, deliveries were up by 1.9% on the previous year at 426,774 vehicles as a result of the sustained economic recovery; of this total, 334,087 were light commercial vehicles, 87,258 were trucks and 5,429 were buses. The Transporter and Caddy were the most sought-after Group models in the Western European markets. We handed over 76,054 vehicles to customers in the markets in Central and Eastern Europe in the period from January to December 2017 (+16.3%); of this figure, 41,291 were light commercial vehicles, 33,613 were trucks and 1,150 were buses. The Transporter and the Caddy were the Group models experiencing the highest demand. In Russia, the region s largest market, sales climbed 61.9% year-on-year to 18,291 units on the back of the incipient economic recovery, demand for replacement vehicles and falling inflation rates. In the Other markets, deliveries of Volkswagen Group commercial vehicles fell by 5.3% to a total of 67,155 units: 46,678 light commercial vehicles, 17,050 trucks and 3,427 buses. Deliveries in North America amounted to 13,416 vehicles (+20.4%), which were handed over almost exclusively to customers in Mexico. In this region, we handed over 10,432 light commercial vehicles, 1,042 trucks and 1,942 buses to customers. The Volkswagen Group sold a total of 75,949 units (+28.3%) in South America. Of the units delivered, 41,331 were light commercial vehicles, 29,589 were trucks and 5,029 were buses. The Transporter and the Amarok were particularly popular. In Brazil, deliveries rose by 34.9% once the difficult economic climate improved; here, 12,633 light commercial vehicles, 20,363 trucks and 2,785 buses were handed over to customers. In the Asia-Pacific region, the Volkswagen Group delivered 43,457 vehicles to customers in the reporting period; 26,287 light commercial vehicles, 14,929 trucks and 2,241 buses. This was 20.8% more than in the previous year. The Transporter and the Amarok were the most popular Group models. In China, sales were up 47.2% on the previous year at 10,408 vehicles. Of this total, 5,566 were light commercial vehicles, 4,532 were trucks and 310 were buses. COMMERCIAL VEHICLE DELIVERIES TO CUSTOMERS BY MARKET 1 DELIVERIES (UNITS) CHANGE (%) Europe/Other markets 569, , Western Europe 426, , Central and Eastern Europe 76,054 65, Other markets 67,155 70, North America 13,416 11, South America 75,949 59, of which: Brazil 35,781 26, Asia-Pacific 43,457 35, of which: China 10,408 7, Worldwide 702, , Volkswagen Commercial Vehicles 497, , Scania 90,777 81, MAN 114, , Deliveries for 2016 have been updated to reflect subsequent statistical trends.

110 106 Business Development Group Management Report DELIVERIES IN THE POWER ENGINEERING SEGMENT Orders in the Power Engineering segment are usually part of major investment projects. Lead times typically range from just under one year to several years, and partial deliveries as construction progresses are common. Accordingly, there is a time lag between incoming orders and sales revenue from the new construction business. Sales revenue in the Power Engineering segment was largely driven by Engines & Marine Systems and Turbomachinery, which together generated well over two-thirds of overall sales revenue. ORDERS RECEIVED IN THE PASSENGER CARS SEGMENT IN WESTERN EUROPE Due to the positive development of the Western European markets, demand for passenger cars increased in fiscal year 2017 compared with the previous year. Incoming orders in the reporting period were 6.0% higher than in At the same time, incoming orders rose in Germany (+6.7%), just as in other significant markets throughout the region. ORDERS RECEIVED FOR COMMERCIAL VEHICLES Orders received for light commercial vehicles of the Volkswagen Group in Western Europe were 2.7% higher than in the previous year at 347,964 units. New orders for mid-sized and heavy trucks and buses witnessed a positive trend in 2017, with orders received for 225,813 vehicles (+18.5%). In Western Europe, our main sales market, ongoing positive economic stimulus gave a boost to incoming orders. The order intake in South America rose after the difficult economic climate improved, especially in Brazil. ORDERS RECEIVED IN THE POWER ENGINEERING SEGMENT The long-term performance of the Power Engineering business is determined by the macroeconomic environment. Individual major orders lead to fluctuations in incoming orders during the year that do not correlate with these longterm trends. Orders received in the Power Engineering segment in 2017 amounted to 3.7 (3.3) billion. Engines & Marine Systems and Turbomachinery generated around two-thirds of the order volume in a persistently difficult market environment. The power plant business performed positively. For example, a Turkish energy company ordered 38 engines with a combined output of 754 MW for its floating power plants, which provide a flexible solution to pressing energy shortages. The Company was also successful in the Indonesian market, securing orders for 25 engines with an aggregate output of 314 MW. VOLKSWAGEN GROUP FINANCIAL SERVICES The Financial Services Division combines the Volkswagen Group s dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility offerings. The division comprises Volkswagen Financial Services and the financial services activities of Scania, Porsche and Porsche Holding Salzburg. Demand for the Financial Services Division s products and services remained strong in fiscal year At 7.3 (7.1) million, the number of new financing, leasing, service and insurance contracts signed worldwide was above the previous year s level. The ratio of leased or financed vehicles to Group deliveries (penetration rate) in the Financial Services Division s markets rose to 33.4 (33.3)% in the reporting period. As of December 31, 2017, the total number of contracts was 18.4 million, up 5.7% as against the end of The number of contracts in the Customer financing/leasing area rose by 6.3% to 10.1 million, while it increased by 5.0% to 8.4 million in the Service/Insurance area. In the Europe/Other markets region, the number of new contracts signed in the past fiscal year climbed 3.7% to 5.4 million. At the end of the reporting period, the total number of contracts was 13.4 million, up 8.0% year-on-year. Of this figure, 6.4 million contracts were attributable to the Customer financing/leasing area (+8.6%). The penetration rate improved to 47.6 (46.8)%. The number of contracts in North America as of December 31, 2017 declined to 2.7 million, 4.7% fewer than in the previous year. The Customer financing/leasing area accounted for 1.8 million contracts ( 3.4%). The number of new contracts signed amounted to 874 thousand, a decrease of 11.6% versus the previous year. The ratio of leased or financed vehicles to Group deliveries in North America fell to 60.5 (63.3)%.

111 Group Management Report Business Development 107 In South America, 205 (197) thousand new contracts were signed in The total number of contracts at the end of the reporting period was 538 thousand, down 16.9% compared to the end of the previous year. The contracts mainly related to the Customer financing/leasing area. At 26.6 (30.4)%, the penetration rate was lower than in In the Asia-Pacific region, the number of new contracts signed rose by 12.7% to 834 thousand units. At the end of 2017, the total number of contracts was 1.8 million, up 15.9% year-on-year. The Customer financing/leasing area accounted for 1.5 million contracts (+20.8%). The ratio of leased or financed vehicles to Group deliveries in this region was 16.1 (15.1)%. SALES TO THE DEALER ORGANIZATION The Volkswagen Group s sales to the dealer organization increased by 3.7% to 10,777,048 units (including the Chinese joint ventures) in the reporting year. This was due to higher demand in Asia-Pacific, especially China, in South America and North America, and in Europe. Outside Germany, the unit sales volume rose by 4.1%. In Germany, we increased unit sales by 0.6%. At 11.7%, the proportion of the Group s sales accounted for by Germany was lower than in 2016 ( 12.1%). The Golf, Polo, Jetta, Lavida and Tiguan were our biggest sellers last year. The largest increases in demand were recorded by the Tiguan, Gol and Atlas/Teramont models from the Volkswagen Passenger Cars brand, the Audi Q2 and the A5 family, and the ŠKODA Kodiaq and SEAT Ateca. The Porsche Panamera achieved a strong growth rate. INVENTORIES Global inventories at Group companies and in the dealer organization were higher at the end of the reporting period than at year-end 2016, mainly due to demand-induced stock building. EMPLOYEES Including the Chinese joint ventures, the Volkswagen Group employed an average of 634,396 people (excluding trainees) in fiscal year 2017, an increase of 2.4% year-on-year. Our companies in Germany employed 284,734 people on average in 2017; at 44.9 (45.2)%, their share of the headcount was slightly below the level of the previous year. The Volkswagen Group had 615,081 active employees (+2.3%) as of December 31, In addition, 8,004 employees were in the passive phase of their partial retirement and 19,207 young people were in vocational traineeships. The Volkswagen Group s headcount was 642,292 employees (+2.5%) at the end of the reporting period. The productionrelated expansion, the recruitment of specialists within and outside Germany and the expansion of the workforce in the new plants in Mexico, China and Poland were offset by the reduction of around 9,800 employees as a result of the disposal of part of the PGA Group SAS. A total of 287,480 people were employed in Germany (+2.1%), while 354,812 were employed abroad (+2.8%). EMPLOYEES BY DIVISION/BUSINESS AREA as of December 31, 2017 PRODUCTION The Volkswagen Group produced 10,875,000 vehicles worldwide in fiscal year 2017, 4.5% more than in the previous year. In total, our Chinese joint ventures manufactured 3.7% more units than in the year before. The percentage of the Group s total production accounted for by Germany was lower than in 2016, at 23.7 (25.8)%. Our plants worldwide produced an average of 44,170 vehicles per working day, an increase of 2.3% on the prior-year level. Starting in 2017, the Crafter is included in the Volkswagen Group s production figures. Passenger Cars Commercial Vehicles Power Engineering Financial Services 507, ,673 16, ,149

112 108 Shares and Bonds Group Management Report Shares and Bonds Volkswagen AG s ordinary and preferred shares outperformed the market as a whole in 2017 in a volatile environment. The Volkswagen Group successfully returned to the European bond market. EQUITY MARKETS AND PERFORMANCE OF THE PRICE OF VOLKSWAGEN S SHARES In the period from January to December 2017, prices on the international equity markets rose amid volatile trading. The DAX also recorded an increase compared with the end of The promising economic performance of important industrialized nations, the improved situation in the US labor market, and the outcome of the elections in some EU member states had a positive impact, as did the adopted US tax reform, which among other factors contributed to financial relief for companies. Uncertainty as regards to the economic policy of the new US government, the election results in Europe, the monetary policy of the US Federal Reserve as well as the European Central Bank, the strong euro and international crises also had a negative impact on share listings at times. In 2017, Volkswagen AG s preferred and ordinary shares surpassed the rising market trend amid high volatility. Positive stimulus was generated by settlement agreements in the USA in connection with the diesel issue, strong corporate earnings, sizeable cash flow and the successful performance of the Volkswagen Passenger Cars brand. Share prices were negatively impacted by the provisions required in connection with the diesel issue as well as uncertainty about further legal risks arising from the diesel issue, suspected antitrust behavior by German automotive companies and the future regulatory framework for diesel and electric vehicles. VOLKSWAGEN KEY SHARE FIGURES AND MARKET INDICES FROM JANUARY 1 TO DECEMBER 31, 2017 High Low Closing Ordinary share Price ( ) Date Nov. 30 Aug. 10 Dec. 29 Preferred share Price ( ) Date Nov. 30 Aug. 31 Dec. 29 DAX Price 13,479 11,510 12,918 Date Nov. 3 Feb. 6 Dec. 29 ESTX Auto & Parts Price Date Nov. 3 July 31 Dec. 29

113 Group Management Report Shares and Bonds 109 PRICE DEVELOPMENT FROM DECEMBER 2016 TO DECEMBER 2017 Index based on month-end prices: December 31, 2016 = Volkswagen ordinary shares +23.4% Volkswagen preferred shares +24.8% DAX +12.5% EURO STOXX Automobiles & Parts +13.8% D J F M A M J J A S O N D DIVIDEND POLICY Our dividend policy matches our financial strategy. In the interests of all stakeholders, we aim for continuous dividend growth so that our shareholders can participate appropriately in our business success. The proposed dividend amount therefore reflects our financial management objectives in particular, ensuring a solid financial foundation as part of the implementation of our strategy. The Board of Management and Supervisory Board of Volkswagen AG are proposing a dividend of 3.90 per ordinary share and 3.96 per preferred share. On this basis, the total dividend for fiscal year 2017 amounts to 2.0 (1.0) billion. The payout ratio is based on the Group s earnings after tax attributable to Volkswagen AG shareholders. This amounts to 17.3% for the reporting period and stood at 19.7% in the previous year. In our new Group strategy, we aim to achieve a payout ratio of 30%. FURTHER INFORMATION ON VOLKSWAGEN SHARES DIVIDEND YIELD Based on the dividend proposal for the reporting period, the dividend yield on Volkswagen ordinary shares is 2.3 (1.5)%, measured by the closing price on the last trading day in The dividend yield on preferred shares is 2.4 (1.5)%. The current dividend proposal can be found in the chapter entitled Volkswagen AG (condensed, according to the German Commercial Code), on page 131 of this annual report. EARNINGS PER SHARE Basic earnings per ordinary share were (10.24) in fiscal year Basic earnings per preferred share were (10.30). In accordance with IAS 33, the calculation is based on the weighted average number of ordinary and preferred shares outstanding in the reporting period. Since the number of basic and diluted shares is identical, basic earnings per share correspond to diluted earnings per share. See also note 11 to the Volkswagen consolidated financial statements for the calculation of earnings per share.

114 110 Shares and Bonds Group Management Report SHAREHOLDER STRUCTURE AT DECEMBER 31, 2017 as a percentage of subscribed capital VOLKSWAGEN SHARE DATA Ordinary shares Preferred shares SHAREHOLDER STRUCTURE AT DECEMBER 31, 2017 Volkswagen AG s subscribed capital amounted to 1,283,315, at the end of the reporting period. The shareholder structure of Volkswagen AG as of December 31, 2017 is shown in the chart on this page. The distribution of voting rights for the 295,089,818 ordinary shares was as follows at the reporting date: Porsche Automobil Holding SE, Stuttgart, held 52.2% of the voting rights. The second-largest shareholder was the State of Lower Saxony, which held 20.0% of the voting rights. Qatar Holding LLC was the third-largest shareholder, with 17.0%. The remaining 10.8% of ordinary shares were attributable to other shareholders. Notifications of changes in voting rights in accordance with the Wertpapierhandelsgesetz (WpHG German Securities Trading Act) are published on our website at OUR INVESTOR RELATIONS TEAM IS AVAILABLE FOR QUERIES AND COMMENTS AT ALL TIMES: WOLFSBURG OFFICE (VOLKSWAGEN AG) Phone +49 (0) Fax +49 (0) investor.relations@volkswagen.de Internet LONDON OFFICE Phone BEIJING OFFICE Phone Porsche Automobil Holding SE Foreign institutional investors Qatar Holding LLC State of Lower Saxony Private shareholders/others German institutional investors ISIN DE DE WKN Deutsche Börse/Bloomberg VOW VOW3 Reuters VOWG.DE VOWG_p.DE Primary market indices Exchanges CDAX, Prime All Share, MSCI Euro, S&P Global 100 Index DAX, CDAX, EURO STOXX, EURO STOXX 50, EURO STOXX Automobiles & Parts, Prime All Share, MSCI Euro Berlin, Düsseldorf, Frankfurt, Hamburg, Hanover, Munich, Stuttgart, Xetra, Luxembourg, New York 1, SIX Swiss Exchange 1 Traded in the form of sponsored unlisted American Depositary Receipts (ADRs). Five ADRs correspond to one underlying Volkswagen ordinary or preferred share. INVESTOR RELATIONS ACTIVITIES Investor relations activities in fiscal year 2017 were dominated mainly by communications related to the Volkswagen Group s future program TOGETHER Strategy 2025 as well as the relevant initiatives and programs launched by the Group brands and regions. One of the central activities was a Capital Markets Day held as part of the annual press and investor conference on March 14, 2017 at which detailed information on Volkswagen s strategy and financial targets was provided. The targets were firmed up at the annual planning session and communicated in November at a conference call. In fiscal year 2017, the Investor Relations team once again provided extensive information to investors and analysts in all key financial markets worldwide about the strategic focus, current business performance and future prospects of the Volkswagen Group. At roughly 700 one-onone discussions, road shows and conferences, we maintained close contact with capital market participants. Many of these discussions involved an exchange of ideas between investors and analysts and members of the Board of Management and Group senior executives, in addition to some discussions with the Chairman of the Supervisory Board. Additional Volkswagen share data, as well as corporate news, reports and presentations can be downloaded from our website at

115 Group Management Report Shares and Bonds 111 VOLKSWAGEN SHARE KEY FIGURES DIVIDEND DEVELOPMENT Number of no-par value shares at Dec. 31 Ordinary shares thousands 295, , , , ,090 Preferred shares thousands 206, , , , ,148 Dividend 1 per ordinary share per preferred share Dividend paid 1 million 1,967 1, ,294 1,871 on ordinary shares million 1, ,416 1,180 on preferred shares million SHARE PRICE DEVELOPMENT Ordinary share Closing Price performance % Annual high Annual low Preferred share Closing Price performance % Annual high Annual low Beta factor 3 factor Market capitalization at Dec. 31 billion Equity attributable to Volkswagen AG shareholders and hybrid capital investors at Dec. 31 billion Ratio of market capitalization to equity factor KEY FIGURES PER SHARE Earnings per ordinary share 4 basic diluted Equity Price/earnings ratio 6 Ordinary share factor x Preferred share factor x Dividend yield 7 Ordinary share % Preferred share % STOCK EXCHANGE TURNOVER Turnover of Volkswagen ordinary shares billion million shares Turnover of Volkswagen preferred shares billion million shares Volkswagen share of total DAX turnover % Figures for the years 2013 to 2016 relate to dividends paid in the following year. For 2017, the figures relate to the proposed dividend. 2 Xetra prices. 3 See page 127 for the calculation. 4 See note 11 to the consolidated financial statements (Earnings per share) for the calculation. 5 Based on the total number of ordinary and preferred shares on December 31 (excluding potential shares from the mandatory convertible note). 6 Ratio of year-end-closing price to earnings per share. 7 Dividend per share based on the year-end-closing price. 8 Order book turnover on the Xetra electronic trading platform (Deutsche Börse).

116 112 Shares and Bonds Group Management Report REFINANCING STRUCTURE OF THE VOLKSWAGEN GROUP as of December 31, 2017 Commercial paper 14% Money and capital market instruments Bonds 52% Asset-backed securities 34% 1 year 30% > 1 to < 5 years 45% 5 years 25% Maturities EUR 68% USD 12% Others 20% Currencies REFINANCING In the course of 2017, the Volkswagen Group was able to increase the number of bonds issued on various money and capital markets compared with the prior year. In particular, senior and unsecured bonds were issued again in Europe, where we successfully placed a benchmark bond for the Automotive Division for the first time since This had a volume of 8.0 billion. We were also active for the Financial Services Division in this market, issuing three benchmark bonds totaling 7.75 billion. In addition to this, we issued private placements. In June 2017, we boosted net liquidity by placing unsecured, subordinated hybrid notes with an aggregate principal amount of 3.5 billion. The perpetual notes were issued in two tranches and can only be called by the issuer. One tranche with a volume of 1.5 billion can only be called after five and a half years, while the other tranche of 2.0 billion can only be called after ten years. A further focus of refinancing was the issue of commercial paper, especially in Europe and in euros. Asset-backed security (ABS) transactions were another important element of our refinancing activities, amounting to over 4.1 billion in Europe. Bonds and ABS transactions were also issued in local capital markets, including Australia, Brazil, China, India and Mexico. In addition, the Financial Services Division issued a public promissory note with a value of 0.9 billion. The proportion of fixed-rate instruments in the past year was roughly twice as high as the proportion of variable-rate instruments. In all refinancing arrangements, we pursue the goal of excluding risks related to interest rates and currency by entering into derivatives contracts at the same time. The table below shows how our money and capital market programs were utilized as of December 31, 2017, and illustrates the financial flexibility of the Volkswagen Group: PROGRAMS Authorized volume billion Amount utilized on Dec. 31, 2017 billion Commercial Paper Bonds of which hybrid issues 11.0 Asset-backed securities

117 Group Management Report Shares and Bonds 113 RATINGS VOLKSWAGEN AG VOLKSWAGEN FINANCIAL SERVICES AG VOLKSWAGEN BANK GMBH Standard & Poor s short-term A 2 A 2 A 2 A 2 A 2 A 2 A 2 A 2 A 2 long-term BBB+ BBB+ BBB+ BBB+ BBB+ BBB+ A A A outlook stable negative negative stable negative negative negative negative negative Moody s Investors Service short-term P 2 P 2 P 2 P 2 P 1 P 1 P 1 P 1 P 1 long-term A3 A3 A3 A3 A2 A1 A3 Aa3 A1 outlook negative negative negative negative negative negative negative negative negative The 20.0 billion syndicated credit line for Volkswagen AG that was agreed with a banking syndicate in December 2015 was terminated in June 2017 as contractually agreed. After exercising an extension option in 2015, the syndicated credit line of 5.0 billion agreed in July 2011 was extended to April This credit facility remained unused as of the end of Syndicated credit lines worth a total of 6.4 billion at other Group companies have also not been drawn down. In addition, Group companies had arranged bilateral, confirmed credit lines with national and international banks in various other countries for a total of 8.5 billion, of which 3.4 billion was drawn down. respectively. In September 2017, the long-term rating for Volkswagen Financial Services AG was lowered by one notch from A2 to A3. The rating for Volkswagen Bank GmbH was downgraded by three notches from Aa3 to A3. The short-term rating of Volkswagen Financial Services AG was lowered by one notch from P 1 to P 2, while that of Volkswagen Bank GmbH remained unchanged at P 1. These changes were due to the completion of the reorganization at Financial Services AG: Volkswagen Bank GmbH is now a subsidiary of Volkswagen AG. This means that the financing structures of Volkswagen Bank GmbH and Volkswagen Financial Services AG are examined separately. The outlook for all three companies is still classed as negative. RATINGS In 2017, the rating agencies Standard & Poor s and Moody s Investors Service conducted the regular update of their credit ratings for Volkswagen AG, Volkswagen Financial Services AG and Volkswagen Bank GmbH. In November 2017, Standard & Poor s confirmed its short-term and long-term ratings of A 2 and BBB+ for Volkswagen AG and Volkswagen Financial Services AG, and of A 2 and A for Volkswagen Bank GmbH. The outlook for Volkswagen AG and Volkswagen Financial Services AG improved from negative to stable due to the better than expected operating performance. The outlook for Volkswagen Bank GmbH was left unchanged at negative. Moody s Investors Service left the short-term and longterm ratings of Volkswagen AG unchanged at P 2 and A3 VOLKSWAGEN IN SUSTAINABILITY RANKINGS AND INDICES Analysts and investors are basing their recommendations and decisions increasingly on companies sustainability profiles. They draw primarily on sustainability ratings to evaluate a company s environmental, social and governance performance. In sustainability rankings and indices such as the Dow Jones Sustainability Indices, FTSE4 Good Indices, Sustainalytics and oekom research, where we held top positions before the emissions issue, Volkswagen s ratings have been downgraded or removed. Volkswagen had a score of A in the CDP (formerly Carbon Disclosure Project) and an A rating in the Water Disclosure Project (WDP).

118 114 Results of Operations, Financial Position and Net Assets Group Management Report Results of Operations, Financial Position and Net Assets The Volkswagen Group generated significantly higher sales revenue in fiscal year 2017 than in Despite further charges and high cash outflows in connection with the diesel issue, operating profit exceeded the prior-year figure and net liquidity in the Automotive Division continued at a robust level. The Volkswagen Group s segment reporting comprises the four reportable segments Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services, in compliance with IFRS 8 and in line with the Group s internal management and reporting. At Volkswagen, segment result is measured on the basis of the operating result. The reconciliation column contains activities and other operations that do not by definition constitute segments. These include the unallocated Group financing activities. The reconciliation also contains consolidation adjustments between the segments (including the holding company functions). Purchase price allocation for Porsche Holding Salzburg and Porsche, Scania and MAN reflects their accounting treatment in the segments. The Automotive Division comprises the passenger cars, commercial vehicles and power engineering segments, as well as the figures from the reconciliation. The passenger cars segment and the reconciliation are combined to form the Passenger Cars Business Area; for commercial vehicles and power engineering, the segment is the same as the business area. The Financial Services Division corresponds to the financial services segment. SALE OF THIRD-PARTY-BRAND DEALERSHIPS OF PORSCHE HOLDING SALZBURG The sale of part of the PGA Group SAS to the Emil Frey Group was executed on June 1, The sale was made in connection with the strategic development of Porsche Holding Salzburg s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. This had a positive effect of 0.8 billion on the Group s net liquidity and, taking into account the disposal of the assets and liabilities, resulted in immaterial income for the Group, which was reported in other operating income. KEY FIGURES FOR 2017 BY SEGMENT million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue 188,405 35,200 3,283 33, ,621 29, ,682 Segment result (operating result) 12,644 1, ,673 17,153 3,335 13,818 as a percentage of sales revenue Capex, including capitalized development costs 15,713 1, , ,313

119 Group Management Report Results of Operations, Financial Position and Net Assets 115 SPECIAL ITEMS Special items consist of certain items in the financial statements whose separate disclosure the Board of Management believes can enable a better assessment of our economic performance. In fiscal year 2017, negative special items recognized in the operating profit amounted to 3.2 ( 7.5) billion. In the reporting period, these related exclusively to charges in the Passenger Cars Business Area in connection with the diesel issue, primarily due to higher expenses attributable to the buyback/retrofit programs for 2.0 l and 3.0 l TDI vehicles in North America and to higher legal risks. In fiscal year 2016, these items amounted to 6.4 billion. The prior-year period also contained additional special items in the Passenger Cars Business Area for potentially faulty airbags manufactured and supplied by Takata ( 0.3 billion), as well as for restructuring measures in the Passenger Cars ( 0.2 billion), Commercial Vehicles ( 0.1 billion) and Power Engineering ( 0.2 billion) business areas. In 2016, provisions recognized in connection with the commercial vehicles antitrust proceedings launched by the European Commission also led to special items ( 0.4 billion) in the Commercial Vehicles Business Area. RESULTS OF OPERATIONS Results of operations of the Group In 2017, the Volkswagen Group s sales revenue increased by 6.2% year-on-year to billion. In particular, higher volumes and the healthy business performance in the Financial Services Division had a positive effect, while exchange rates had a negative impact. At 80.8 (79.9)% the major share of sales revenue was recorded outside Germany. Gross profit improved by 1.5 billion to 42.5 billion. Adjusted for special items recorded under this item in both periods, gross profit increased to 44.8 (42.5) billion. The gross margin amounted to 18.4 (18.9)%; excluding special items it was 19.4 (19.6)%. In the reporting period, the Volkswagen Group generated an operating profit before special items of 17.0 (14.6) billion; the operating return on sales before special items rose to 7.4 (6.7)%. The increase was mainly the result of positive volume-, mix- and margin-related factors, as well as improvements in product costs, while higher fixed costs as a result of expansion and higher depreciation and amortization charges due to the large volume of capital expenditure had an offsetting effect. Negative special items weighed on operating INCOME STATEMENT BY DIVISION VOLKSWAGEN GROUP AUTOMOTIVE 1 FINANCIAL SERVICES million Sales revenue 230, , , ,016 33,733 31,251 Cost of sales 188, , , ,860 27,526 25,410 Gross profit 42,542 40,997 36,335 35,156 6,207 5,841 Distribution expenses 22,710 22,700 21,353 21,453 1,357 1,248 Administrative expenses 8,254 7,336 6,554 5,730 1,700 1,606 Net other operating result 2,240 3,858 2,717 3, Operating result 13,818 7,103 11,146 4,668 2,673 2,435 Operating return on sales (%) Share of the result of equity-accounted investments 3,482 3,497 3,473 3, Interest result and Other financial result 3,388 3,308 3,209 3, Financial result Earnings before tax 13,913 7,292 11,411 4,884 2,502 2,408 Income tax expense 2,275 1,912 3,295 1,149 1, Earnings after tax 11,638 5,379 8,116 3,735 3,522 1,645 Noncontrolling interests Earnings attributable to Volkswagen AG hybrid capital investors Earnings attributable to Volkswagen AG shareholders 11,354 5,144 8,099 3,591 3,255 1,553 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions.

120 116 Results of Operations, Financial Position and Net Assets Group Management Report SHARE OF SALES REVENUE BY MARKET 2017 in percent SHARE OF SALES REVENUE BY DIVISION/BUSINESS AREA 2017 in percent Europe (excluding Germany)/ Other markets Germany North America South America Asia-Pacific 43% 19% 17% 4% 17% Passenger Cars Commercial Vehicles Power Engineering Financial Services 69% 15% 1% 15% profit, reducing this item by a total of 3.2 ( 7.5) billion. At 13.8 billion, the Volkswagen Group s operating profit was up 6.7 billion on the previous year. The operating return on sales rose to 6.0 (3.3)%. The financial result declined to 0.1 (0.2) billion. Lower interest expenses and lower expenses from the measurement of derivative financial instruments at the reporting date had a positive effect, while foreign currency measurement had a negative impact. The share of the result of equity-accounted investments was at the prior-year level. This includes the gain on the remeasurement of the investment in HERE following the acquisition of shares by additional investors. In the prioryear period, the income from the sale of the LeasePlan shares had a positive effect. The Volkswagen Group s profit before tax rose to 13.9 billion in the reporting period, up 6.6 billion on the prior-year figure. The return on sales before tax improved from 3.4% to 6.0%. Profit after tax amounted to 11.6 (5.4) billion. Although income taxes increased, the tax rate of 16.3 (26.2)% was considerably lower in the reporting period. This decline was due to the tax reform in the USA passed at the end of the year, which led to a non-recurring positive non-cash measurement effect on deferred taxes of 1.0 billion. Results of operations in the Automotive Division The Automotive Division s sales revenue amounted to billion in fiscal year 2017, thus exceeding the prioryear figure by 10.9 billion. The improvement resulted primarily from higher vehicles sales, which were offset by negative exchange rate effects. As our Chinese joint ventures are accounted for using the equity method, the Group s business performance in the Chinese passenger car market is reflected in consolidated sales revenue primarily by deliveries of vehicles and vehicle parts. Cost of sales increased due to larger volumes; in addition, a rise in special items and higher depreciation and amortization charges had a negative impact, while improvements in product costs had a positive effect. Total research and development costs as a percentage of the Automotive Division s sales revenue (research and development ratio or R&D ratio) declined to 6.7 (7.3)% in the reporting period as a result of higher sales revenues and lower expenses. In addition to new models, our activities focused above all on the electrification of our vehicle portfolio, a more efficient range of engines, and digitalization. Expressed as a percentage of sales revenue, cost of sales rose slightly year-on-year. The gross profit of the Automotive Division improved to 36.3 (35.2) billion. Distribution expenses were on a level with the previous year, which had been impacted by negative special items. Exchange rate effects weighed on the 2017 figure. The ratio of distribution expenses to sales revenue declined. Administrative expenses as well as their ratio to sales revenue increased compared with the previous year. At 2.7 billion in fiscal year 2017, the net other operating result exceeded the prior year by 6.0 billion, driven in particular by much lower negative special items in connection with the diesel issue and by exchange rate effects. The operating profit of the Automotive Division improved by 6.5 billion to 11.1 billion. The operating return on sales stood at 5.7 (2.5)%. Negative special items contained in operating profit totaled 3.2 ( 7.5) billion. These items were exclusively attributable to the Passenger Cars Business Area in the reporting period, reflecting charges in connection with the diesel issue. Excluding the special items, the Automotive

121 Group Management Report Results of Operations, Financial Position and Net Assets 117 Division s operating profit rose to 14.4 (12.2) billion. The operating return on sales before special items increased to 7.3 (6.6)%. The main contributors were improvements in volumes, the mix and margins, as well as product cost optimization; these factors were offset by higher fixed costs as a result of expansion and higher depreciation and amortization charges. Operating profit benefited from the business performance of our Chinese joint ventures primarily in the form of deliveries of vehicles and vehicle parts and of license income, as the joint ventures are accounted for using the equity method and therefore included in the financial result. mercial Vehicles Business Area improved by 1.2 billion to 1.9 billion; the operating return on sales climbed to 5.4 (2.2)%. The increase versus the previous year, which had been negatively impacted by special items, was mainly the result of positiv volume- and margin-related factors and the expansion of the service business. RESULTS OF OPERATIONS IN THE POWER ENGINEERING BUSINESS AREA million RESULTS OF OPERATIONS IN THE PASSENGER CARS BUSINESS AREA Sales revenue 3,283 3,593 Operating result Operating return on sales (%) million Sales revenue 158, ,343 Operating result 9,309 4,167 Operating return on sales (%) The Passenger Cars Business Area generated sales revenue of billion in fiscal year 2017, thus exceeding the prioryear figure by 5.4%, mainly because of volume-related factors. Exchange rates had a negative effect. The operating profit of 9.3 billion generated in the Passenger Cars Business Area was up 5.1 billion on the previous year. Special items included in this item decreased significantly year-on-year to 3.2 ( 6.9) billion. Improvements in volumes, the mix and margins, and product cost optimization had a positive influence, while a rise in fixed costs and higher depreciation and amortization charges had a negative impact. The operating return on sales rose to 5.9 (2.8)%. RESULTS OF OPERATIONS IN THE COMMERCIAL VEHICLES BUSINESS AREA The Power Engineering Business Area s sales revenue of 3.3 billion in fiscal year 2017 was 8.6% lower than in the previous year. The operating loss declined by 0.2 billion to 0.1 billion. Lower volumes were offset by positive mix effects. Special items had a negative impact in the previous year. The operating return on sales improved from 6.0% to 1.7%. Results of operations in the Financial Services Division In the Financial Services Division, sales revenue increased by 7.9% year-on-year to 33.7 billion in fiscal year 2017, due mainly to the growth in business volumes. As a result, gross profit went up by 0.4 billion to 6.2 billion. Both distribution and administrative expenses increased year-on-year; in addition to higher volumes, the rise in expenses was attributable in particular to digitalization. The ratio of distribution and administrative expenses to sales revenue was unchanged. The net other operating result amounted to 0.5 ( 0.6) billion. The 9.8% year-on-year increase in operating profit to 2.7 billion reflects the Financial Services Division s sustained contribution to the Group s success. The operating return on sales improved to 7.9 (7.8)%. The return on equity before tax was 9.8%, compared with 10.8% in the previous year. million Sales revenue 35,200 32,080 Operating result 1, Operating return on sales (%) The Commercial Vehicles Business Area recorded sales revenue of 35.2 billion in the reporting period, 3.1 billion more than in the previous year; this increase was driven mainly by larger volumes. The operating profit of the Com-

122 118 Results of Operations, Financial Position and Net Assets Group Management Report PRINCIPLES AND GOALS OF FINANCIAL MANAGEMENT Financial management at the Volkswagen Group covers liquidity management, currency, interest rate and commodity risk management, as well as credit and country risk management. It is performed centrally for all Group companies by Group Treasury, based on internal directives and risk parameters. The main areas of the MAN and Porsche Holding Salzburg subgroups are integrated into the financial management of the Group, while Scania is covered to a limited extent. Additionally, these subgroups have their own financial management structures. The goal of liquidity management is to ensure that the Volkswagen Group remains solvent at all times and at the same time to generate an adequate return from the investment of surplus funds. We use cash pooling to optimize the use of existing liquidity between the significant companies in Europe. To do this, the balances, either positive or negative, accumulating in the cash pooling accounts are swept daily into a target account at Group Treasury and thus pooled. Currency, interest rate and commodity risk management is designed to hedge the prices on which investment, production and sales plans are based using derivative financial instruments. Credit and country risk management aims to limit the Volkswagen Group s exposure to the risk of loss or default by means of diversification. To achieve this, internal limits are defined on the basis of various credit risks for the volume of business per counterparty when entering into financial transactions. These primarily focus on the capital resources of potential counterparties, as well as the ratings awarded by independent agencies. The relevant risk limits and the authorized financial instruments, hedging methods and hedging horizons are approved by the Group Board of Management Committee for Risk Management, which replaced the Group Board of Management Committee for Liquidity and Foreign Currency in the reporting period. For additional information on the principles and goals of financial management, please refer to page 187 and to the notes to the 2017 consolidated financial statements on pages 282 to 291. FINANCIAL POSITION Financial position of the Group The Volkswagen Group s gross cash flow amounted to 32.7 billion in fiscal year 2017, 25.5% more than in the previous year. At 33.8 ( 16.6) billion, the change in working capital was significantly negative. As expected, there were high cash outflows in connection with the diesel issue in the reporting period, primarily resulting from vehicle recalls and legal risks. As a result, cash flows from operating activities decreased by 10.6 billion to 1.2 billion. The new special items recognized in the reporting period had a negative impact on gross cash flow and a positive effect on the change in working capital. The Volkswagen Group s investing activities attributable to operating activities rose to 18.2 billion, 8.5% more than in the previous year. In the reporting period, the Acquisition and disposal of equity investments item particularly includes the acquisition of shares in Navistar as well as the sale of part of the PGA Group. The figure for the previous year had mainly been influenced by the cash inflow from the sale of the shares in LeasePlan. Cash inflows from financing activities amounted to 17.6 (9.7) billion. These primarily include the issuance and redemption of bonds and other financial liabilities. The dualtranche hybrid notes ( 3.5 billion), successfully placed in June 2017, increased net liquidity; this was offset by the dividend paid to the shareholders of Volkswagen AG ( 1.0 billion). At the end of the reporting period, the Volkswagen Group s cash and cash equivalents as reported in the cash flow statement amounted to 18.0 (18.8) billion and were thus down on the prior-year reporting date. The Volkswagen Group's net liquidity as of December 31, 2017 was ( 107.9) billion.

123 Group Management Report Results of Operations, Financial Position and Net Assets 119 CASH FLOW STATEMENT BY DIVISION VOLKSWAGEN GROUP AUTOMOTIVE 1 FINANCIAL SERVICES million Cash and cash equivalents at beginning of period 18,833 20,462 14,125 15,294 4,709 5,168 Earnings before tax 13,913 7,292 11,411 4,884 2,502 2,408 Income taxes paid 3,664 3,315 3,514 3, Depreciation and amortization expense 2 22,165 20,924 14,948 14,331 7,218 6,593 Change in pension provisions Other noncash income/expense and reclassifications Gross cash flow 32,651 26,007 23,418 16,468 9,233 9,539 Change in working capital 33,836 16,576 11,732 3,803 22,104 20,379 Change in inventories 4,198 3,637 3,784 3, Change in receivables 1,660 2, , Change in liabilities 5,302 5,048 4,168 4,474 1, Change in other provisions 9,910 5,732 10,079 5, Change in lease assets (excluding depreciation) 11,478 12,074 1,115 1,157 10,363 10,917 Change in financial services receivables 11,891 9, ,906 9,547 Cash flows from operating activities 1,185 9,430 11,686 20,271 12,871 10,840 Cash flows from investing activities attributable to operating activities 18,218 16,797 17,636 15, of which: investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs 13,052 13,152 12,631 12, capitalized development costs 5,260 5,750 5,260 5,750 acquisition and disposal of equity investments 317 1, , Net cash flow 4 19,404 7,367 5,950 4,330 13,454 11,696 Change in investments in securities, loans and time deposits 1,710 3,882 2,333 3, Cash flows from investing activities 16,508 20,679 15,303 19,066 1,205 1,613 Cash flows from financing activities 17,625 9,712 3,562 2,298 14,063 12,009 of which: capital transactions with noncontrolling interests 3 3 Capital contributions/capital redemptions 3,473 2,400 1,454 1,073 1,454 Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents 796 1, , Cash and cash equivalents at Dec ,038 18,833 13,428 14,125 4,609 4,709 Securities, loans and time deposits 26,291 28,036 15,201 17,911 11,090 10,125 Gross liquidity 44,329 46,869 28,630 32,036 15,699 14,833 Total third-party borrowings 163, ,819 6,251 4, , ,963 Net liquidity 6 119, ,950 22,378 27, , ,130 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions. 2 Net of impairment reversals. 3 These relate mainly to the fair value measurement of financial instruments, application of the equity method and the reclassification of gains/losses on disposal of noncurrent assets and equity investments to investing activities. 4 Net cash flow: cash flows from operating activities, net of cash flows from investing activities attributable to operating activities (investing activities excluding change in investments in securities, loans and time deposits). 5 Cash and cash equivalents comprise cash at banks, checks, cash-in-hand and call deposits. 6 The total of cash, cash equivalents, securities, loan receivables from related parties and time deposits net of third-party borrowings (noncurrent and current financial liabilities).

124 120 Results of Operations, Financial Position and Net Assets Group Management Report AUTOMOTIVE DIVISION NET CASH FLOW 2017 in billion Gross cash flow Change in working capital Capex Capitalized development costs Other Net cash flow Financial position of the Automotive Division The Automotive Division's gross cash flow was 23.4 billion in fiscal year 2017, thus exceeding the prior-year figure by 6.9 billion. The increase in operating profit before special items and the year-on-year decline in special items had a positive effect. At 11.7 (3.8) billion, the change in working capital was significantly negative. As expected, there were high cash outflows in the reporting period related to the diesel issue, primarily for vehicle recalls and legal risks. As a result, cash flows from operating activities amounted to 11.7 billion, 8.6 billion less than in The new special items recognized in fiscal year 2017 had a negative impact on gross cash flow and a positive effect on the change in working capital. Investing activities attributable to operating activities increased by 1.7 billion to 17.6 billion. At 12.6 (12.8) billion, investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs (capex) were on a level with the previous year. The ratio of capex to sales revenue declined to 6.4 (6.9)% due primarily to the rise in sales revenue. We invested mainly in our production facilities and in models that we launched in the reporting period or are planning to launch next year. These are primarily vehicles in the Polo, Tiguan, Audi A6, Audi A8 and Audi e-tron series, as well as the Audi A4, Porsche Cayenne, Porsche 911 and the Bentley Continental family. Other investment priorities included the ecological focus of our model range, drivetrain electrification and our modular toolkits. At 5.3 (5.8) billion, capitalized development costs were lower than in the previous year. In the reporting period, the Acquisition and disposal of equity investments item mainly includes the acquisition of shares in Navistar and the sale of part of the PGA Group. In the prior-year period, the sale of the shares in LeasePlan had a significantly positive effect on this item. The Automotive Division s net cash flow reflects the division's strong operating performance, although it declined by 10.3 billion to 6.0 billion driven, as expected, by high cash outflows attributable to the diesel issue. A capital increase carried out by Volkswagen AG at Volkswagen Financial Services AG at the beginning of 2017 in order to finance the growth in business volumes and comply with regulatory capital requirements resulted in outflows of 1.0 billion in the Automotive Division s financing activities. In May 2017, a dividend totaling 1.0 billion was distributed to the shareholders of Volkswagen AG, 0.9 billion more than in the previous year. The successful placement of dualtranche hybrid notes with an aggregate principal amount of 3.5 billion via Volkswagen International Finance N.V. in June 2017 resulted in a cash inflow. The notes consist of a 1.5 billion note that carries a coupon of 2.7% and has a first call date after five and a half years, and a 2.0 billion note that carries a coupon of 3.875% and has a first call date after ten years. Both tranches are perpetual and increase equity, net of transaction costs, among other factors. The cash inflows from the hybrid notes were classified as a capital contribution,

125 Group Management Report Results of Operations, Financial Position and Net Assets 121 which increased net liquidity. In addition, financing activities include the issuance and redemption of bonds and other financial liabilities. They amounted to 3.6 billion in 2017, 5.9 billion more than in the prior-year period. On December 31, 2017, the Automotive Division s net liquidity was again at a robust level of 22.4 billion, compared with 27.2 billion at the end of The Automotive Division s net liquidity represents 9.7 (12.5)% of consolidated sales revenue in the reporting period. FINANCIAL POSITION IN THE PASSENGER CARS BUSINESS AREA million Gross cash flow 19,410 13,920 Change in working capital 10,122 3,454 Cash flows from operating activities 9,289 17,374 Cash flows from investing activities attributable to operating activities 15,337 13,353 Net cash flow 6,048 4,021 In the reporting period, the Passenger Cars Business Area recorded gross cash flow of 19.4 billion, up 5.5 billion on the prior-year figure, mainly due to earnings-related factors; a significant year-on-year decline in negative special items also had a positive effect. The change in working capital was significantly negative, decreasing by 13.6 billion year-on-year to 10.1 billion. As expected, there were high cash outflows related to the diesel issue in fiscal year 2017, primarily for vehicle recalls and legal risks. Consequently, cash flows from operating activities decreased by 46.5% to 9.3 billion. The new special items recognized in the reporting period had a negative impact on gross cash flow and a positive effect on the change in working capital. Investing activities attributable to operating activities resulted in cash outflows of 15.3 (13.4) billion in the reporting period. The year-on-year increase in capex of 0.3 billion to 11.2 billion was more than offset by the 0.4 billion decline in capitalized development costs to 4.6 billion. The item included the sale of part of the PGA Group in the reporting period; in the prior-year period, the sale of the LeasePlan shares had a significantly positive impact. Net cash flow amounted to 6.0 (4.0) billion. FINANCIAL POSITION IN THE COMMERCIAL VEHICLES BUSINESS AREA million Gross cash flow 3,739 2,496 Change in working capital 1, Cash flows from operating activities 2,419 2,734 Cash flows from investing activities attributable to operating activities 2,122 2,407 Net cash flow The Commercial Vehicles Business Area generated gross cash flow of 3.7 billion in the reporting period, 1.2 billion above the prior-year figure due to earnings-related factors. At 1.3 (0.2) billion, the change in working capital was significantly negative. In the prior-year period, the special items recognized had a negative impact on gross cash flow and a positive effect on the change in working capital. Cash flows from operating activities were slightly down on the 2016 figure, declining to 2.4 (2.7) billion. Despite the acquisition of shares in Navistar and investments in a new cab generation at Scania, investing activities attributable to operating activities were down year-on-year, amounting to 2.1 (2.4) billion; the previous year had been affected by investments in the new plant for light commercial vehicles in Wrzesnia in Poland. At 0.3 (0.3) billion, net cash flow was on a level with the previous year. FINANCIAL POSITION IN THE POWER ENGINEERING BUSINESS AREA million Gross cash flow Change in working capital Cash flows from operating activities Cash flows from investing activities attributable to operating activities Net cash flow In fiscal year 2017, the Power Engineering Business Area s gross cash flow improved to 0.3 (0.1) billion. Funds tied up in working capital increased by 0.4 billion to 0.3 billion. The comparison with the prior-year period has to take special items into account. Cash flows from operating activities were down on the previous year, breaking even in the reporting period. At 0.2 (0.2) billion, investing activities attributable to operating activities were on a level with the previous year. Net cash flow declined to 0.2 (0.0) billion.

126 122 Results of Operations, Financial Position and Net Assets Group Management Report CONSOLIDATED BALANCE SHEET BY DIVISION AS OF DECEMBER 31 VOLKSWAGEN GROUP AUTOMOTIVE 1 FINANCIAL SERVICES million Assets Noncurrent assets 262, , , , , ,007 Intangible assets 63,419 62,599 63,211 62, Property, plant and equipment 55,243 54,033 52,503 51,415 2,739 2,619 Lease assets 39,254 38,439 3,140 3,385 36,114 35,054 Financial services receivables 73,249 68, ,256 68,393 Investments, equity-accounted investments and other equity investments, other receivables and financial assets 30,916 30,537 22,065 21,822 8,851 8,715 Current assets 160, ,722 80,210 81,083 79,902 74,640 Inventories 40,415 38,978 36,113 34,947 4,302 4,031 Financial services receivables 53,145 49, ,832 50,333 Other receivables and financial assets 32,040 30,286 17,354 17,561 14,686 12,726 Marketable securities 15,939 17,520 13,512 14,703 2,427 2,817 Cash, cash equivalents and time deposits 18,457 19,265 13,826 14,532 4,632 4,733 Assets held for sale Total assets 422, , , , , ,647 Equity and liabilities Equity 109,077 92,910 81,605 69,130 27,472 23,780 Equity attributable to Volkswagen AG shareholders 97,761 85,122 70,857 61,714 26,904 23,408 Equity attributable to Volkswagen AG hybrid capital investors 11,088 7,567 11,088 7,567 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 108,849 92,689 81,945 69,281 26,904 23,408 Noncontrolling interests Noncurrent liabilities 152, ,306 69,805 69,982 82,921 69,324 Financial liabilities 81,628 66,358 6,709 5,876 74,919 60,483 Provisions for pensions 32,730 33,012 32,189 32, Other liabilities 38,368 39,936 30,906 31,643 7,462 8,293 Current liabilities 160, ,515 69,711 80,973 90,678 96,542 Put options and compensation rights granted to noncontrolling interest shareholders 3,795 3,849 3,795 3,849 Financial liabilities 81,844 88, ,019 82,302 89,481 Trade payables 23,046 22,794 20,497 20,753 2,548 2,041 Other liabilities 51,705 62,411 45,877 57,391 5,828 5,021 Total equity and liabilities 422, , , , , ,647 1 Including allocation of consolidation adjustments between the Automotive and Financial Services divisions, primarily intragroup loans.

127 Group Management Report Results of Operations, Financial Position and Net Assets 123 CONSOLIDATED BALANCE SHEET STRUCTURE 2017 in percent Noncurrent assets 62.1 (62.0) Current assets 37.9 (38.0) Total assets Total equity and liabilities Equity 25.8 (22.7) Noncurrent liabilities 36.2 (34.0) Current liabilites 38.0 (43.3) Financial position in the Financial Services Division The Financial Services Division s gross cash flow declined to 9.2 billion in the reporting period, 0.3 billion lower than in the previous year. Due to larger volumes, funds tied up in working capital increased by 1.7 billion to 22.1 billion. Cash flows from operating activities amounted to 12.9 ( 10.8) billion. At 0.6 (0.9) billion, investing activities attributable to operating activities were down on the previous year, which had included the acquisition of shares in the ride-hailing service Gett. The Financial Services Division s financing activities resulted in cash inflows of 14.1 (12.0) billion in This included a capital increase of 1.0 billion implemented by Volkswagen AG to finance expected business growth and to comply with stricter regulatory requirements. At the end of 2017, the Financial Services Division s negative net liquidity, which is common in the industry, stood at billion, compared with billion at the end of December NET ASSETS Consolidated balance sheet structure At the end of the reporting period, the Volkswagen Group s total assets amounted to billion, 3.0% more than as of December 31, The increase, which was partially offset by exchange rate effects, was primarily due to a rise in business volumes in the Financial Services Division. The structure of the consolidated balance sheet as of the reporting date is shown in the chart on this page. The Volkswagen Group s equity increased to billion, 16.2 billion more than at the end of the previous reporting period. The equity ratio rose to 25.8 (22.7)%. The assets held for sale item contains primarily the anticipated carrying amount of some of the shares in There Holding, which are expected to be disposed of ( 0.1 billion). The negotiations are still ongoing, and the disposals are expected to be finalized in the first half of As of the end of fiscal year 2017, the Group had offbalance-sheet commitments in the form of contingent liabilities in the amount of 8.4 (6.8) billion, financial guarantees in the amount of 0.3 (0.2) billion and other financial obligations in the amount of 24.5 (25.9) billion. Contingent liabilities relate primarily to legal risks in connection with the diesel issue as well as potential liabilities from tax risks in the Commercial Vehicles Business Area in Brazil. The other financial obligations primarily result from purchase commitments for property, plant and equipment, obligations under longterm leasing and rental contracts and irrevocable credit commitments to customers. In addition, they include investments to which the Group has committed itself, in the infrastructure for zero-emission vehicles and in initiatives to promote access to and awareness of this technology. These commitments were made as part of the settlement agreements in the USA in connection with the diesel issue. Other financial obligations include an amount of 1.3 billion for this purpose. Automotive Division balance sheet structure At the end of the reporting period, the Automotive Division s intangible assets and property, plant and equipment both increased slightly year-on-year. Lease assets were down compared with the end of December 2016 as a result of the sale of part of the PGA Group. Equity-accounted investments declined slightly. The positive business results of the Chinese joint ventures, the purchase of the shares in Navistar and the remeasurement of the interest in HERE were offset by dividend payments resolved by the Chinese joint ventures, the remeasurement of investments, as well as the reclassification of some of the shares in There Holding, which are

128 124 Results of Operations, Financial Position and Net Assets Group Management Report now held for sale. At (139.0) billion, total noncurrent assets were on a level with the previous year. Current assets amounted to 80.2 (81.1) billion and were virtually unchanged year-on-year; the inventories included in this figure increased by 3.3% for production-related reasons. Total securities stood at 13.5 (14.7) billion and total cash and cash equivalents at 13.8 (14.5) billion, both showing a decline compared with December 31, At the end of 2017, the Automotive Division s equity rose by 18.0% year-on-year to 81.6 billion. It was positively impacted by healthy earnings growth despite special items, as well as by effects from the measurement of derivatives recognized outside profit or loss, the hybrid notes issued in June 2017 and lower actuarial losses from the measurement of pension provisions. Currency translation effects and the dividend paid to the shareholders of Volkswagen AG led to a decline in the Automotive Division s equity. The capital increase implemented in the Financial Services Division also reduced equity in the Automotive Division, where the deduction was recognized. The noncontrolling interests are mainly attributable to RENK AG and AUDI AG. As these were lower overall than the noncontrolling interests attributable to the Financial Services Division, the figure for the Automotive Division, where the deduction was recognized, was negative. The equity ratio increased to 36.9 (31.4)%. Noncurrent liabilities of 69.8 (70.0) billion were on a level with December 31, Noncurrent other liabilities were down, primarily as a result of the positive effects from the measurement of derivatives. The tax reform in the USA passed at the end of the year led to a decline in deferred tax liabilities of 1.0 billion. As of December 31, 2017, current liabilities amounted to 69.7 billion, a decline of 13.9% compared with the end of Among other things, reclassifications from noncurrent to current liabilities due to shorter remaining maturities led to an increase in current financial liabilities to 0.5 ( 1.0) billion. The figures for the Automotive Division also contain the elimination of intragroup transactions between the Automotive and Financial Services divisions. As the current financial liabilities for the primary Automotive Division were lower than the loans granted to the Financial Services Division, a negative amount was disclosed. The item Put options and compensation rights granted to noncontrolling interest shareholders primarily comprises the liability for the obligation to acquire the shares held by the remaining free float shareholders of MAN. Current other liabilities were down as a result of the positive effects from the measurement of derivatives. Current other provisions declined significantly due to their use in connection with the diesel issue. At the end of 2017, the Automotive Division s total assets amounted to (220.1) billion and were thus on a level with the previous year. PASSENGER CARS BUSINESS AREA BALANCE SHEET STRUCTURE million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets 111, ,918 Current assets 60,052 61,600 Total assets 171, ,518 Equity 66,449 54,789 Noncurrent liabilities 55,118 56,703 Current liabilities 49,762 60,026 As of December 31, 2017, noncurrent assets in the Passenger Cars Business Area increased by 1.4 billion to billion. While intangible assets and property, plant and equipment were higher, equity-accounted investments declined. Lease assets decreased, primarily due to the partial sale of the PGA Group. Current assets were at the prior-year level, amounting to 60.1 (61.6) billion; the inventories included in this figure increased for production-related reasons. Total securities and cash and cash equivalents were down in the reporting period. On December 31, 2017, total assets were virtually unchanged compared with the previous year, at (171.5) billion. At 66.4 billion, the Passenger Cars Business Area s equity was 21.3% higher than the prior-year figure, mainly due to earnings-related factors and the hybrid note issued in the reporting period. Noncurrent liabilities decreased by 2.8%. The financial liabilities and other liabilities included in this item were down significantly. Deferred tax liabilities include the positive effect of the tax reform in the USA. Current liabilities were down 17.1% year-on-year. Current other provisions declined significantly due to their use in connection with the diesel issue.

129 Group Management Report Results of Operations, Financial Position and Net Assets 125 COMMERCIAL VEHICLES BUSINESS AREA BALANCE SHEET STRUCTURE million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets 27,005 26,206 Current assets 16,908 16,197 Total assets 43,913 42,403 Equity 12,194 11,185 Noncurrent liabilities 13,975 12,531 Current liabilities 17,744 18,687 In the Commercial Vehicles Business Area, intangible assets were lower and property, plant and equipment higher at the end of December 2017 than at the end of the previous reporting period. Equity-accounted investments increased because of the acquisition of the shares in Navistar. Overall, noncurrent assets grew by 0.8 billion to 27.0 billion. Higher inventories and receivables led to a 4.4% rise in current assets to 16.9 billion. At 43.9 billion, total assets exceeded the prior-year figure by 3.6%. The 9.0% rise in equity to 12.2 billion in the reporting period was mainly attributable to improved earnings. Noncurrent liabilities increased by 11.5%; the noncurrent financial liabilities contained in this item were up significantly. Driven mainly by a marked decrease in current financial liabilities, current liabilities declined by 5.0%. POWER ENGINEERING BUSINESS AREA BALANCE SHEET STRUCTURE reported total assets of 5.9 billion, down 4.6% on the previous year. At the end of fiscal year 2017, equity amounted to 3.0 billion, an earnings-related decline of 6.1% compared with the end of the previous year. Both noncurrent and current liabilities were slightly down year-on-year at the end of the reporting period. Financial Services Division balance sheet structure On December 31, 2017, total assets in the Financial Services Division of billion exceeded the prior-year figure by 6.0%. Noncurrent assets increased by a total of 5.4% compared with the end of Within this item, lease assets and noncurrent financial services receivables rose in line with the growth in business. Higher volumes led to a 7.1% rise in current assets. Current financial services receivables were up 3.5 billion, at 53.8 billion. As of the balance sheet date, the Financial Services Division accounted for around 47.6 (46.3)% of the Volkswagen Group s assets. Equity in the Financial Services Division amounted to 27.5 billion at the end of 2017, 15.5% more than on the previous year s balance sheet date. Equity was pushed up by earnings growth and by the capital increase implemented by Volkswagen AG at the beginning of the year to finance the growth in business and to meet regulatory capital requirements. The equity ratio rose to 13.7 (12.5)%. Higher noncurrent financial liabilities to fund business growth led to an overall increase of 19.6% in noncurrent liabilities compared with December 31, Current liabilities declined by 6.1%; the current financial liabilities contained in this item fell significantly. At 31.4 (33.3) billion, deposits from direct banking business were lower than at the end of the previous year. million Dec. 31, 2017 Dec. 31, 2016 Noncurrent assets 2,629 2,879 Current assets 3,250 3,285 Total assets 5,879 6,165 Equity 2,963 3,157 Noncurrent liabilities Current liabilities 2,205 2,260 At the end of the reporting period, noncurrent assets in the Power Engineering Business Area were lower than the yearend 2016 figure, driven primarily by a decrease in intangible assets. Current assets were on a level with the previous year. On December 31, 2017, the Power Engineering Business Area

130 126 Results of Operations, Financial Position and Net Assets Group Management Report VALUE ADDED STATEMENT The value added statement indicates the added value generated by a company in the past fiscal year as its contribution to the gross domestic product of its home country, and how it is appropriated. Due to the improved operating profit before special items and lower negative special items, the value added generated by the Volkswagen Group in the reporting period was up 16.8% year-on-year. Added value per employee increased to thousand (+13.9%) in Employees in the passive phase of their partial retirement as well as vocational trainees are not included in the calculation. VALUE ADDED GENERATED BY THE VOLKSWAGEN GROUP Source of funds in million Sales revenue 230, ,267 Other income 18,912 17,907 Cost of materials 151, ,307 Depreciation and amortization 22,165 20,924 Other upfront expenditures 17,615 23,990 Value added 58,364 49,953 Appropriation of funds in million 2017 % 2016 % to Volkswagen AG shareholders (dividend, 2017 dividend proposal) 1, , to employees (wages, salaries, benefits) 38, , to the state (taxes, duties) 3, , to creditors (interest expense) 4, , to the Company (reserves) 9, , Value added 58, ,

131 Group Management Report Results of Operations, Financial Position and Net Assets 127 RETURN ON INVESTMENT (ROI) AND VALUE CONTRIBUTION The Volkswagen Group s financial target system centers on continuously and sustainably increasing the value of the Company. In order to ensure the efficient use of resources in the Automotive Division and to measure the success of this, we have been using a value-based management system for a number of years, with return on investment (ROI) as a relative indicator and value contribution 1, a key performance indicator linked to the cost of capital, as an absolute performance measure. The return on investment serves as a consistent target in strategic and operational management. If the return on investment exceeds the market cost of capital, there is an increase in the value of the invested capital and a positive value contribution. The concept of value-based management allows the success of the Automotive Division and individual business units to be evaluated. It also enables the earnings power of our products, product lines and projects such as new plants to be measured. Components of value contribution Value contribution is calculated on the basis of the operating result after tax and the opportunity cost of invested capital. The operating result shows the economic performance of the Automotive Division and is initially a pre-tax figure. Using the various international income tax rates of the relevant companies, we assume an overall average tax rate of 30% when calculating the operating result after tax. The cost of capital is multiplied by the average invested capital to give the opportunity cost of capital. Invested capital is calculated as total operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories and receivables) less non-interest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting period. As the concept of value-based management only comprises our operating activities, assets relating to investments in subsidiaries and associates and the investment of cash funds are not included when calculating invested capital. Interest charged on these assets is reported in the financial result. 1 The value contribution corresponds to the Economic Value Added (EVA ). EVA is a registered trademark of Stern Stewart & Co. Determining the current cost of capital The cost of capital is the weighted average of the required rates of return on equity and debt. The cost of equity is determined using the Capital Asset Pricing Model (CAPM). This model uses the yield on long-term risk-free Bunds, increased by the risk premium attaching to investments in the equity market. The risk premium comprises a general market risk and a specific business risk. The general risk premium of 6.5% reflects the general risk of a capital investment in the equity market and is oriented on the Morgan Stanley Capital International (MSCI) World Index. The specific business risk price fluctuations in Volkswagen preferred shares has been modeled in comparison to the MSCI World Index when calculating the beta factor. The MSCI World Index is a global capital market benchmark for investors. The analysis period for the beta factor calculation spans five years with annual beta figures on a daily basis and an average subsequently being calculated. A beta factor of 1.12 (1.22) was determined for COST OF CAPITAL AFTER TAX AUTOMOTIVE DIVISION % Risk-free rate MSCI World Index market risk premium Volkswagen-specific risk premium (Volkswagen beta factor) (1.12) (1.22) Cost of equity after tax Cost of debt Tax Cost of debt after tax Proportion of equity Proportion of debt Cost of capital after tax The cost of debt is based on the average yield for long-term debt. As borrowing costs are tax-deductible, the cost of debt is adjusted to account for the tax rate of 30%. A weighting on the basis of a fixed ratio for the fair values of equity and debt gives an effective cost of capital for the Automotive Division of 6.0 (6.2)% for 2017.

132 128 Results of Operations, Financial Position and Net Assets Group Management Report RETURN ON INVESTMENT (ROI) AND VALUE CONTRIBUTION IN THE REPORTING PERIOD The operating result after tax of the Automotive Division, including the proportionate operating result of the Chinese joint ventures, was 11,756 (7,419) million in fiscal year The increase was due primarily to the year-on-year decline in special items, as well as to improvements in volumes and in the mix and to optimized product costs. Profit was negatively impacted by higher fixed costs as a result of expansion and by higher depreciation and amortization charges due to the large volume of capital expenditure. Effects on earnings and assets from purchase price allocation are not taken into account as they cannot be influenced operationally by management. Invested capital rose to 97,021 (91,020) million, primarily due to higher inventories as well as to additions to investments in property, plant and equipment and capitalized development costs. The return on investment (ROI) is the return on invested capital for a particular period based on the operating result after tax. The ROI improved year-on-year on the back of the higher operating profit and, at 12.1 (8.2)%, exceeded our minimum rate of return on invested capital of 9% in spite of the adverse effects of the special items on earnings. At 5,821 (5,643) million, the opportunity cost of capital (invested capital multiplied by cost of capital) was up on the prior-year level due to the increase in the invested capital. Operating result after tax was negatively impacted by special items and led to a positive value contribution of 5,935 (1,775) million after the opportunity cost of invested capital. More information on value-based management is contained in our publication entitled Financial Control System of the Volkswagen Group, which can be downloaded from our Investor Relations website: RETURN ON INVESTMENT (ROI) AND VALUE CONTRIBUTION IN THE AUTOMOTIVE DIVISION 1 million Operating result after tax 11,756 7,419 Invested capital (average) 97,021 91,020 Return on investment (ROI) in % Cost of capital in % Cost of invested capital 5,821 5,643 Value contribution 5,935 1,775 1 Including proportionate inclusion of the Chinese joint ventures (including the relevant sales and component companies) and allocation of consolidation adjustments between the Automotive and Financial Services divisions.

133 Group Management Report Results of Operations, Financial Position and Net Assets 129 SUMMARY OF BUSINESS DEVELOPMENT AND ECONOMIC POSITION The Board of Management of Volkswagen AG considers business development and the economic position to have been positive overall. In spite of the diesel issue, which continues to keep us very busy, and the persistently challenging market conditions, we increased our deliveries to customers in 2017 as forecast. At 10.7 million vehicles we lifted deliveries to customers by 4.3%, achieving a new record. We saw growth in Europe, North and South America and the Asia-Pacific region. The higher volume was a significant factor in the 6.2% increase in the Group s sales revenue and thus confirmed the current forecast. As a consequence, operating profit before special items rose to 17.0 billion and the operating return on sales before special items, at 7.4%, was moderately higher than the range forecast at the beginning of the year of %. After deducting special items resulting exclusively from the diesel issue, the operating return on sales of 6.0% was at the lower end of this scale, as recently projected. Research and development costs underscore the efforts made to ensure the Company s future viability; at 6.7%, the R&D ratio in the Automotive Division was inside the expected range. The Automotive Division s ratio of capex to sales revenue was reduced to 6.4%, which put it within the forecast range as well. Owing to high cash outflows attributable to the diesel issue, the Automotive Division s net cash flow was negative, as anticipated. The Automotive Division s net liquidity fell as a result, but was still a robust 22.4 billion at the end of the reporting period. On the back of the increase in earnings, the return on investment (ROI) in the Automotive Division improved markedly to 12.1%, thus exceeding the minimum required rate of return on invested capital. FORECAST VERSUS ACTUAL FIGURES Actual 2016 Original forecast for 2017 Adjusted forecast for 2017 Actual 2017 Deliveries to customers 10.3 million moderate increase moderate increase 10.7 million Volkswagen Group Sales revenue billion increase of up to 4% > 4% billion Operating return on sales before special items 6.7% % moderately above 7.0% 7.4% Operating return on sales 3.3% % ~6.0% 6.0% Operating result before special items 14.6 billion within the forecast range within the forecast range 17.0 billion Operating result 7.1 billion within the forecast range within the forecast range 13.8 billion Passenger Cars Business Area Sales revenue billion increase of up to 4% > 4% billion Operating return on sales before special items 7.4% % moderately above 7.5% 7.9% Operating return on sales 2.8% % slightly below 6.5% 5.9% Operating result before special items 11.1 billion within the forecast range within the forecast range 12.5 billion Operating result 4.2 billion within the forecast range within the forecast range 9.3 billion Commercial Vehicles Business Area Sales revenue 32.1 billion increase of up to 4% > 4% 35.2 billion Operating return on sales 2.2% % moderately above 5.0% 5.4% Operating result 0.7 billion within the forecast range within the forecast range 1.9 billion Power Engineering Business Area Sales revenue 3.6 billion significant decline significant decline 3.3 billion Operating result 0.2 billion lower loss lower loss 0.1 billion Financial Services Division Sales revenue 31.3 billion at prior-year level noticeable increase 33.7 billion Operating result 2.4 billion at prior-year level noticeable increase 2.7 billion R&D ratio in the Automotive Division 7.3% % % 6.7% Capex/sales revenue in the Automotive Division 6.9% % % 6.4% Net cash flow in the Automotive Division 4.3 billion significant decline, negative significant decline, negative 6.0 billion Net liquidity in the Automotive Division 27.2 billion significant decline significant decline 22.4 billion Return on investment (ROI) in the Automotive Division 8.2% noticeable increase, > 9% noticeable increase, > 9% 12.1%

134 130 Volkswagen AG Group Management Report Volkswagen AG (Condensed, in accordance with the German Commercial Code) Production and unit sales stable at 2016 level, sales revenue and earnings up on prior-year figures. ANNUAL RESULT Special items recognized in fiscal year 2017 were exclusively attributable to the diesel issue, mainly due to higher expenses for the buyback/retrofit programs for 2.0 l TDI vehicles in North America and higher legal risks. These special items had an impact of 2.0 ( 0.8) billion on cost of sales and of 0.9 ( 4.5) billion on other operating income. Moreover, special items of 0.4 billion had affected distribution expenses in the previous year. In fiscal year 2017, sales were 1.9% higher than in the previous year, at 76.7 billion. Sales generated abroad accounted for a share of 62.5 (61.2)%. The cost of sales increased by 4.5% to 73.4 billion. Gross profit fell to 3.4 (5.1) billion. At 7.1 billion, selling, general and administrative expenses were down 1.2 billion on the prior-year figure. The net other operating result improved by 1.9 billion to 0.2 ( 2.0) billion. At 8.6 (8.7) billion, the financial result stood at the prioryear level. Including the income tax expense of 0.4 ( 0.7) billion, net income for the year amounted to 4.4 billion in the year under review, compared with 2.8 billion in the previous year. INCOME STATEMENT OF VOLKSWAGEN AG BALANCE SHEET OF VOLKSWAGEN AG AS OF DECEMBER 31 million million Sales 76,729 75,310 Cost of sales 73,355 70,180 Gross profit on sales 3,375 5,131 Selling, general and administrative expenses 7,104 8,352 Net other operating result 154 2,035 Financial result 1 8,644 8,725 Taxes on income Earnings after tax 4,353 2,799 Net income for the fiscal year 4,353 2,799 Retained profits brought forward 2 2 Appropriations to revenue reserves 2,174 1,399 Net retained profits 2,181 1,402 Fixed assets 113, ,973 Inventories 4,889 4,387 Receivables 1 32,303 26,386 Cash-in-hand and bank balances 5,798 9,117 Total assets 156, ,863 Equity 30,438 27,100 Special tax-allowable reserves Long-term debt 33,060 26,457 Medium-term debt 33,415 30,082 Short-term debt 59,759 58,200 1 Including prepaid expenses. 1 Including write-downs of financial assets.

135 Group Management Report Volkswagen AG 131 NET ASSETS AND FINANCIAL POSITION Total assets amounted to billion at December 31, 2017, up 14.8 billion on the prior-year figure. Investments in tangible and intangible fixed assets declined to 1.7 (2.0) billion. Additions to financial assets rose by 11.4 billion to 33.8 billion. This was offset by depreciation and amortization charges and write-downs as well as by asset disposals totaling to 23.8 (17.3) billion. Fixed assets accounted for a share of 72.6 (71.9)% of total assets. Current assets (including prepaid expenses) amounted to 43.0 (39.9) billion in At 30.4 billion, equity increased due in particular to the improved net income for the year at the end of the reporting period. The equity ratio was 19.4 (19.1)%. Other provisions decreased by 8.7 billion to 22.1 (30.8) billion, due primarily to the utilization of provisions in connection with the diesel issue. Provisions for pensions and similar obligations rose by 0.7 billion to 14.4 billion, primarily as a result of a change in the interest rate, while provisions for taxes decreased by 0.5 billion to 3.5 billion. The 20.0 billion rise in total liabilities (including deferred income) to 86.3 billion is, above all, attributable to higher liabilities to affiliated companies. Volkswagen AG s cash funds, comprising cash instruments with a maturity of less than three months, less bank and cash pooling liabilities repayable on demand, declined year-onyear from 6.2 billion to 8.5 billion. The interest-bearing portion of debt amounted to 74.0 (55.1) billion. In our assessment, the economic position of Volkswagen AG is just as positive overall as that of the Volkswagen Group. DIVIDEND PROPOSAL In fiscal year 2017, net retained profits amounted to 2.2 billion. The Board of Management and Supervisory Board are proposing to pay a total dividend of 2.0 billion, i.e per ordinary share and 3.96 per preferred share. PROPOSAL ON THE APPROPRIATION OF NET PROFIT 2017 Dividend distribution on subscribed capital ( 1,283 million) 1,967,423, of which on: ordinary shares 1,150,850, preferred shares 816,573, Appropriation to other revenue reserves 210,000, Balance (carried forward to new account) 3,299, Net retained profits 2,180,723, EMPLOYEE PAY AND BENEFITS AT VOLKSWAGEN AG million 2017 % 2016 % Direct pay including cash benefits 7, , Social security contributions 1, , Compensated absence 1, , Retirement benefits Total expense 10, ,

136 132 Volkswagen AG Group Management Report VEHICLE SALES Volkswagen AG sold a total of 2,584,375 (2,632,144) vehicles in fiscal year Vehicles sold abroad accounted for a share of 70.0 (69.7)%. PRODUCTION Volkswagen AG produced a total of 1,224,609 vehicles at its vehicle production plants in Wolfsburg, Hanover and Emden in the reporting period ( 1.3%). Volkswagen AG s average daily production was 5,370 (5,423) units. EMPLOYEES As of December 31, 2017, a total of 117,420 (113,928) people were employed at the sites of Volkswagen AG, excluding staff employed at subsidiaries. Of this figure, 4,953 (4,999) were vocational trainees. 4,380 (2,936) employees were in the passive phase of their partial retirement. Female employees accounted for 17.1 (17.0)% of the workforce. Volkswagen AG employed 5,069 (4,721) part-time workers. The percentage of foreign employees was 6.1 (6.1)% (83.5)% of the employees in Volkswagen AG s production area had completed vocational or additional training in the reporting period. The proportion of graduates was 18.9 (18.8)% in the same period. The average age of employees in fiscal year 2017 was 43.6 (43.2) years. EXPENDITURE ON ENVIRONMENTAL PROTECTION When measuring expenditure on environmental protection, a distinction is made between investments and operating costs for production-related environmental protection measures. Of our total investments, only those that are spent exclusively or primarily on environmental protection are included in environmental protection investments. We distinguish here between additive and integrated investments. Additive environmental protection measures are separate and independent of other measures relating to the production process. They can be upstream or downstream of the production process. In contrast to additive environmental protection measures, integrated measures reduce the environmental impact already during the production process. In 2017 we invested primarily in soil and water pollution control. The operating costs recognized for environmental protection relate exclusively to production-related measures that protect the environment against harmful factors by avoiding, reducing, or eliminating emissions by the Company. Resources are also conserved. For example, these include expenditures incurred to operate equipment that protects the environment as well as expenditures for measures not relating to such equipment. As in the previous year, the emphasis in 2017 was on sewage and waste management. RESEARCH AND DEVELOPMENT Research and development costs for Volkswagen AG under the German Commercial Code increased to 4.8 (4.7) billion in the reporting period. 12,332 (12,380) people were employed in this area at the end of the reporting period. VOLKSWAGEN AG EXPENDITURE ON ENVIRONMENTAL PROTECTION million Investments Operating costs

137 Group Management Report Volkswagen AG 133 OPERATING COSTS FOR ENVIRONMENTAL PROTECTION AT VOLKSWAGEN AG 2017 Share of environmental protection areas in percent Sewage management Waste management Air pollution control Soil and water pollution control Climate protection Species and landscape conservation Protection against noise and vibration BUSINESS DEVELOPMENT RISKS AND OPPORTUNITIES AT VOLKSWAGEN AG The business development of Volkswagen AG is exposed to essentially the same risks and opportunities as the Volkswagen Group. These risks and opportunities are explained in the Report on Risks and Opportunities on pages 164 to 189 of this annual report. RISKS ARISING FROM FINANCIAL INSTRUMENTS Risks for Volkswagen AG arising from the use of financial instruments are the same as those to which the Volkswagen Group is exposed. An explanation of these risks can be found on pages 187 to 188 of this annual report. DEPENDENT COMPANY REPORT The Board of Management of Volkswagen AG has submitted to the Supervisory Board the report required by section 312 of the AktG and issued the following concluding declaration: We declare that, based on the circumstances known to us at the time when the transactions with affiliated companies within the meaning of section 312 of the German Stock Corporation Act (AktG) were entered into, our Company received appropriate consideration for each transaction. No transactions with third parties or measures were either undertaken or omitted on the instructions of or in the interests of Porsche or other affiliated companies in the reporting period. The Annual Financial Statements of Volkswagen AG (in accordance with the HGB) can be accessed from the electronic companies register at

138 134 Sustainable Value Enhancement Group Management Report Sustainable Value Enhancement Our goal is to run our business responsibly along the entire value chain. Everyone should benefit from this our customers, our employees, the environment and society. Our future program TOGETHER Strategy 2025 represents the biggest change process in the Company s history. The starting point is our vision of being one of the world s leading providers of sustainable mobility. The main financial key performance indicators for the Volkswagen Group are described in the Results of Operations, Financial Position and Net Assets chapter. Nonfinancial key performance indicators also attest to the efficiency of our Company s value drivers. These include the processes in the areas of research and development, procurement, production, marketing and sales, information technology and quality assurance. In all of these processes, we are aware of our responsibility towards our customers, our employees, the environment and society. In this chapter we provide examples of how we are increasing the value of our Company in a sustainable way. SUSTAINABILITY The Volkswagen Group is committed to sustainable, transparent and responsible corporate governance. The biggest challenge we face in implementing this at all levels and at every step in the value chain is the complexity of our Company, with its twelve brands, more than 642 thousand employees and 120 production locations. In order to tackle this challenge in the best way possible, we follow the Sustainable Development Goals (SDGs) formulated by the United Nations and the recommendations of the German Corporate Governance Code. In addition, we coordinate our sustainability activities across the entire Group. We have also put in place a forward-looking system of risk management and a clear framework for dealing with environmental issues in a future-oriented manner, for employee responsibility and for social commitment across our brands and in the regions in which we operate. For us, sustainability means simultaneously striving for economic, social and environmental goals in a way that gives them equal priority. The future program TOGETHER Strategy 2025 places sustainable growth at the heart of our strategic target dimensions: we want to be an excellent employer and a role model for the environment, safety and integrity, to excite customers and to ensure that we achieve competitive profitability. By 2025, we aim to make the Volkswagen Group the world s number one in e-mobility. We will therefore set new priorities with Roadmap E. We also want to ensure that we recognize opportunities and risks in the areas of environment, society and governance at an early stage at every step along the value chain. Our corporate social responsibility (CSR) activities will contribute toward enhancing our Company s reputation and value in the long term. Management and Coordination The Volkswagen Group has created a clear management structure to coordinate the Group s activities as regards sustainability and CSR. Its highest committee is the Group Board of Management, which acts as the Sustainability Board at the same time. It is regularly briefed by the Group Sustainability steering group on issues related to the topics of sustainability and corporate responsibility. The members of the Group Sustainability steering group include executives from central Board of Management business areas and representatives of the Group Works Council and the brands. The steering group s tasks include identifying the key action areas, making decisions on the strategic sustainability goals, monitoring by means of indicators the extent to which these goals are being met and approving the sustainability report. The sustainability office supports the steering group. Its duties include coordinating all sustainability activities within the Group and the brands. It is also responsible for stakeholder dialog at Group level, for example with sustainabilitydriven analysts and investors. In addition, CSR project teams work across business areas on topics such as reporting, stakeholder management and sustainability in supplier

139 Group Management Report Sustainable Value Enhancement 135 VOLKSWAGEN GROUP S KEY ACTION AREAS Compliance, risk management, governance Diversity and equality Corporate responsibility Health and occupational safety Training Human rights Customer satisfaction Attractiveness as an employer Participation and codetermination Supplier management Product and transport safety ONE OF THE WORLD S LEADING PROVIDERS OF SUSTAINABLE MOBILITY Stability and profitability Integrity Climate protection and decarbonization Zero impact mobility Resource conservation throughout life cycle Environmentally friendly products Nature conservation and biodiversity relationships. This coordination and working structure is also largely established across the brands and is constantly expanding. Since 2009, the Sustainability & CSR coordinators for all brands and regions have come together once a year to promote communication across the Group, create uniform structures and learn from one another. This Group CSR meeting has proven its worth as an integral part of the Group-wide coordination structure. Sustainability Council As part of its efforts to continuously improve and expand its sustainability management, the Volkswagen Group appointed an international Sustainability Council in 2016 made up of renowned experts from the academic world, politics and society. The members of the council establish their own working methods and areas of focus independently and consult with the Board of Management, senior managers and the employee representatives regularly for the purposes of consultation, exchanging information and initiating action. The key issues in 2017 were the challenges created by global CO 2 emissions and the regulatory requirements to be met post-2025, as well as the Company s transformation process. The Volkswagen Group is initially providing 20 million in funding for projects proposed and promoted by the Sustainability Council for the years 2017 and The first projects relate to innovation and cultural change in the area of sustainable mobility, an international crisis prevention initia- tive as a result of climate change and an academic study on the future shape of the transport and climate policy framework. Materiality analysis Two developments in 2017 continued to influence the detailed analysis as to which issues are material to the Volkswagen Group: the realignment of the Group via the future program TOGETHER Strategy 2025, and dealing with the consequences of the diesel issue. After analyzing and identifying topics that are material to the Company, we derived 18 key action areas that we will use to achieve our goal of being one of the world s leading providers of sustainable mobility. The analysis was based on external studies, industry analyses and stakeholder surveys carried out by our brands, internal guidelines such as our corporate strategy and Group environmental strategy, and key factors identified by the Volkswagen Group s strategy committee. As the details of the new Group strategy have not yet been finalized, we are still in the process of specifying the content of the key action areas and defining corresponding values, targets and indicators. As an enterprise with global operations, we also take account of the options available to us for influencing and implementing the SDGs formulated by the United Nations. Principles and guidelines Voluntary commitments and principles that apply throughout the Group form the basis and backbone of our strategic sustainability goals. In addition, our sustainability model provides the framework for sustainable and responsible action. The Volkswagen Group s revised Code of Conduct published in 2017 applies to the entire Group and helps managers and employees alike to deal with legal and ethical challenges in their day-to-day work. We expressly support the United Nations Global Compact, an agreement between the UN and the business world aimed at enhancing the social and ecological aspects of globalization. As long ago as 2002, the Volkswagen Group made a commitment to promoting human rights, labor standards, environmental protection and combating corruption. In 2013, this commitment was extended to include the so-called CEO Water Mandate, the aim of which is to ensure the careful management of water resources. Since the emergence of the diesel issue, we have agreed on a temporary suspension of our membership. Our objective is to ensure that our actions are in line with the declarations of the International Labor Organization (ILO), the principles and conventions of the Organisation for Economic Co-operation and Development (OECD) and the international covenants of the United Nations on basic rights and freedom.

140 136 Sustainable Value Enhancement Group Management Report STAKEHOLDERS OF THE VOLKSWAGEN GROUP BUSINESS Investors and analysts Business partners Competitors ACADEMIA Scientists and experts CUSTOMERS VOLKSWAGEN GROUP EMPLOYEES POLICYMAKERS Agencies and authorities Unions Associations NGOs / nonprofit organizations SOCIETY Religious institutions Residents and communities Cultural, educational and daycare facilities MEDIA Media organizations We have also established our own internal guidelines in the shape of the Volkswagen Social Charter, the Charter on Labor Relations, the Charter on Vocational Education and Training, and the Charter on Temporary Work, all of which apply to the Group as a whole. Environmental protection activities are shaped both by the environmental policy and by the principles for products and production, which apply throughout the Group. Strategic stakeholder management Our stakeholders are individuals, groups, or organizations who materially influence or are influenced by the way in which the Group reaches its corporate decisions and the implications of those decisions. The role of stakeholder management is to manage the many demands placed upon us such that the Group can integrate them into its decisionmaking processes. This includes sharing knowledge, jointly developing solutions for the problems we face and using transparent criteria to make decisions. Our customers and our employees are our key stakeholders. Around this core, we have defined twelve types of stakeholders in five clusters. This classification is the product of a stakeholder assessment in which we regularly identify the Group s key stakeholder groups. The aim is to open up decision-making processes and systematically enhance the Group s sustainability management through constructive criticism. In this context, we take a holistic approach to stakeholder management. RESEARCH AND DEVELOPMENT Forward-looking mobility solutions with brand-defining products and services would be unthinkable without technological innovations. This makes our research and development work essential for sustainably increasing the value of the Company. Together with our Group brands, we have formulated a strategy for networking development activities across the Group and launched numerous initiatives based on our future program TOGETHER Strategy At the heart of this is an efficient, cross-brand development alliance characterized by a close network of experts, collaboration on an equal footing, an innovative working environment and the pooling of development activities. With this alliance, we aim to make use of synergy effects across the Group and act as a role model for the environment, safety and integrity. The alliance is playing a major part in the Volkswagen Group s transformation into a leading provider of sustainable mobility and helping to make the Group fit for the future. Based on this strategic focus, we concentrated in the reporting year on continuing to develop promising mobility solutions, establishing technological expertise to strengthen our competitiveness, expanding our range of products and services and improving the functionality, quality, safety and environmental compatibility of our products and services.

141 Group Management Report Sustainable Value Enhancement 137 CO 2 EMISSIONS OF THE VOLKSWAGEN GROUP S EUROPEAN (EU28) NEW PASSENGER CAR FLEET in grams per kilometer ¹ 120¹ Subject to official publication by the European Commission in the annual CO 2 fleet monitoring report. Fuel and drivetrain strategy The Volkswagen Group s new passenger car fleet in the EU (excluding Lamborghini and Bentley) emitted an average of 122 g CO 2 /km 1 in the reporting period and was thus well below the 2017 European limit of 130 g CO 2 /km. The small year-on-year increase is mainly attributable to the new measurement techniques to be applied and the decline in the proportion of diesel vehicles included in deliveries. As smallvolume manufacturers, the Lamborghini and Bentley brands each have an independent fleet for the purposes of the European CO 2 legislation; Bentley complied with its individual target, Lamborghini was slightly above its target. As part of a Group-wide initiative and with a view to the legal regulations on emissions we are currently developing a forward-looking vehicle and drivetrain portfolio: to achieve our goal of sustainable mobility, we have set ourselves the objective of increasing drive system efficiency with each new model generation irrespective of whether the means of propulsion is a combustion engine, a hybrid, a plug-in hybrid, a purely electric drive, or a fuel cell drive system. We anticipate that by as early as 2025, one in four new Volkswagen Group vehicles worldwide will have a purely electric drive; depending on the market development, this could be up to three million electric vehicles a year. The Volkswagen Group has launched a comprehensive electrification offensive in the form of Roadmap E. By 2025, we plan to offer our customers around the world more than 80 new electric models, including some 50 purely battery-driven vehicles and 30 plug-in hybrids. By 2030, the Volkswagen Group aims to electrify its entire model portfolio from high-volume models to premium vehicles. This will mean offering at least one electric version of each of our approximately 300 models across all Group brands. We are therefore planning to invest more than 20 billion in industrializing e-mobility by 2030, involving, amongst other things, the development of two new electric platforms for vehicles with a range of up to 600 km. Examples include the Volkswagen I.D. family of concept vehicles, the Audi e-tron and Porsche s Mission E. To enable sustainable, affordable mobility for as many people as possible, we will continue to offer the full range of drivetrains from conventional combustion engines to pure electric drive. From today s perspective, the combustion engine looks set to serve as the broad basis for drive technology in the coming years. In the interest of using resources responsibly, it is therefore essential for combustion engines to be further optimized. We use clean technologies to purify exhaust gases. All our new diesel vehicles are now fitted with an SCR catalyst as standard. From 2018, all our petrol engine cars will have particulate filters. In addition to electric drives and more efficient combustion engines, renewable, reduced-co 2 fuels (in gas or liquid form) will also play an ever-greater role. We are committed to expanding the natural gas (CNG) infrastructure and are extending our model range accordingly. We are also intensively researching options for producing fuels from renewable electricity, enabling carbon-neutral operation of combustion engines. Projects such as Audi e-gas (power-to-gas) and SEAT s SMART Green Gas (waste-to-gas) are examples of our commitment in this area. Last but not least, we are working under Audi s leadership to make fuel cell technology ready for market.

142 138 Sustainable Value Enhancement Group Management Report It is more important to us than ever to rigorously pursue our modular approach. We are reducing the number of individual modules so that we can make a large product portfolio economically viable. Over the long term, we will reduce the number of versions of conventional combustion engines in the Group by more than a third, for example. This will create capacity for developing and producing new hybrid and electric drives. Life cycle engineering and recycling Innovations and new technologies for reducing fuel consumption are not enough on their own to minimize the effect of vehicles on the environment. That is why we examine the entire product life cycle of our vehicles from the extraction of raw materials to the production of components and the provision of fuel and energy during vehicle use to their final disposal. We identify the stages of the life cycle at which improvements will have the greatest effect and develop appropriate solutions. We call this life cycle engineering. Recycling, for example, is an important means of reducing environmental impact and conserving resources. When developing new vehicles, we therefore pay attention to the recyclability of the required materials, use high-quality recycled material and avoid pollutants. At the end of their lives, our vehicles are 85% recyclable and 95% recoverable. In implementing the Aluminum Closed Loop project in 2017, we created a closed circuit for aluminum beyond our Company boundaries for the first time. Aluminum scrap was returned directly from our press shops to the supplier for reuse in vehicles. Leveraging synergies increases efficiency When developing vehicles, we cooperate closely with our brands to leverage synergies. The strategy formulated by our development alliance aims, for example, to make the Group more competitive in the long term by deploying resources more effectively and efficiently in the research and development of new mobility-related technologies, products and services. In our Group-wide development alliance, the brands not only work with each other, but also for each other on key technologies, forming broad networks of expertise to address the topics of the future. In the reporting year, we consolidated the Group s activities and responsibility for the development, procurement and quality assurance of all battery cells in the Center of Excellence under the umbrella of the Volkswagen Passenger Cars brand. Pilot production will also start here, with the aim of building up manufacturing expertise for our Group. Our modules are also managed centrally to reduce costs, capital expenditure and complexity. With the aid of a Group initiative, we are seeking to reduce expenditure in the toolkits while at the same time implementing a wide-reaching electrification offensive and focusing on autonomous systems. We will achieve this through a considerable reduction in complexity using streamlined, non-overlapping yet synergistic platforms. The individual Group brands are using the modular toolkits, thus creating synergies between the various models of a model line and across model lines. The streamlined toolkits are creating the financial leeway for development work on the future trends of digitalization and autonomous driving. As part of the TOGETHER Strategy 2025 program, the high-volume passenger car brands have introduced model line organization through a Group initiative, consequently strengthening the brands responsibility for the success of vehicle projects, improving project work across different business areas, accelerating decision-making and improving the result-orientation of projects. Under the umbrella of Volkswagen Truck & Bus, MAN and Scania are continuing to work together on core drivetrain components based on the lead engineering principle. They have expanded their development work in the fields of electrification and autonomous driving. We are also creating synergy effects by continuing to closely share best practices, for instance in virtual development and testing. Finally, the centralized development and consolidation of IT systems is helping to promote cooperation across brands, make development activities more comparable and reduce the Group s IT costs. Sustainable mobility, connectivity and automated driving Mobility is a prerequisite for economic growth. But while the need for constant mobility is rising, natural resources are dwindling. This calls for holistic mobility concepts to minimize environmental impact. Such solutions need to be efficient, sustainable, customer-oriented and accessible anytime and anywhere. We are researching and developing such pioneering concepts and solutions in our Group-wide alliance. In shaping the future of mobility, we are looking not only at the automobile but at all modes of transport and transport infrastructures, at people s mobility habits and at other relevant factors. Innovative technologies such as connectivity and automated driving are enabling us to take completely new problem-solving approaches. We want to take advantage of these to contribute to a comprehensive mobility system of the future and to help shape our industry s digital transformation.

143 Group Management Report Sustainable Value Enhancement 139 Another initiative of our future program TOGETHER Strategy 2025 is the establishment of a cross-brand mobility solutions business. Our mobility business MOIA, which we founded in 2016, is to become one of the leading providers of innovative transport services and will develop profitable, globally applicable business models over the next few years. Strategic investments and partnerships are also being sought. In the reporting year, MOIA conducted service tests for its ride-pooling concept an organized ride-sharing system with a driver among other products in Hanover over several months with selected participants, gathering valuable experience. These and other activities will help to make Volkswagen one of the world s leading providers of efficient and convenient smart mobility services by 2025, with a portfolio encompassing all brands and both mobility-on-demand and vehicle-on-demand services. In December 2017, Volkswagen Truck & Bus launched the digital brand RIO. This cloud-based, multi-vendor platform serves the entire transport and logistics ecosystem. For the first time, everyone in the supply chain shippers, forwarders, carriers, loaders, dispatchers, drivers and recipients will be connected. RIO will offer digital solutions for all the players involved in the transport system. It will work closely with customers to tailor solutions to the needs and demands of the market and continuously enhance them. On the road to autonomous driving, the Volkswagen Group has further improved its assistance systems and automated driving functions in 2017 and fitted them in vehicles. The strategic objective is to market highly automated driving functions for private vehicles, shared mobility systems and commercial mobility providers as a core competency of the Group from With the presentation of the Sedric concept vehicle and a look ahead at the Sedric family from fully autonomous city vehicles to luxurious long-distance mobility, spectacular sports cars, self-driving urban delivery vehicles and heavy trucks the Volkswagen Group has introduced its vision of an autonomous mobility system. Particularly in cities, these vehicles will enable completely new forms of individual mobility even for user groups that have so far been excluded. A balanced combination of different vehicle sizes will also reduce the space required for parking and optimize urban transport as a whole. Autonomous driving in the complex urban environment places heavy demands on technology. We are dedicated to meeting these challenges. Led by Audi, the Volkswagen Group founded Autonomous Intelligent Driving GmbH in This new company will develop a Group-wide system for selfdriving vehicles. The reporting year also saw the presentation of the Audi A8 an innovation highlight with up to 41 driver assistance systems. The AI Traffic Jam Pilot the first automated driving function in a production vehicle deserves special mention. In traffic jam situations on multi-lane highways it enables Level 3 automated driving as defined by international standards at speeds of up to 60 km/h. This means that drivers no longer need to continuously monitor the system. Depending on national legislation, the driver may also perform other permitted tasks while the vehicle is in motion. This results in a high degree of convenience and safety. Audi will gradually introduce the AI Traffic Jam Pilot into series production in various countries: its introduction requires clarification of the respective national legal framework and adjustment and testing of the system accordingly; different national approval processes and deadlines must also be complied with. Using the new AI functions, Porsche is working on improving active driving safety as well as the acceptance of assistance systems and automated driving functions among car drivers. Its current focus is on Grip Prediction, a technical solution to predict how much grip the road surface will offer and adjust driving speed for longitudinal and lateral movement. Vehicle data from prototypes, combined with local weather data, is the basis for this.

144 140 Sustainable Value Enhancement Group Management Report Pooling strengths with strategic alliances The future program TOGETHER Strategy 2025 plans to transform our core business and to establish a new mobility solutions business area at the same time. It is decisive to the success of this plan that we place our great innovative strength on even broader foundations. Growth in the mobility sector is currently a global phenomenon, above all in the economy segment. As part of a Group initiative, Volkswagen is therefore increasingly entering local partnerships to develop and offer economy products in line with the market. This is helping us to identify regional customer needs more precisely, to adjust our product range accordingly and to establish competitive cost structures. In future, we will therefore concentrate to a greater extent on partnerships, acquisitions and venture capital investments, and will manage investment selection centrally so as to generate maximum value for the Group and its brands. Developing battery technology as a core competency has also been defined as a strategic initiative of the Volkswagen Group. The battery accounts for 20 to 30% of the cost of materials in electric vehicles; in future, it will be one of the most important components for differentiating between products. We have already pooled our in-house expertise in battery cells in a Center of Excellence and also plan to accelerate the development of expertise and technological change through intelligent partnerships. We anticipate that our own electric fleet with lithium-ion batteries will require a battery capacity of more than 150 GWh a year in the period to To cover this enormous demand, we are inviting tenders for long-term strategic partnerships in China, Europe and the USA with a global order volume of more than 50 billion in the period to Looking ahead, we are already preparing for the next generation: together with partners, we aim to develop solid-state batteries to market maturity with ranges of more than 1,000 km. In 2017, MAN and the Austrian Council for Sustainable Logistics consortium signed an agreement to jointly develop and test fully electric-powered trucks. The results will feed into the series development of electric trucks for urban delivery traffic. Our mobility business MOIA is currently working with Hamburger Hochbahn AG to develop a new, environmentally friendly mobility service for Hamburg: a shuttle-on-demand service with environmentally friendly electric vehicles is due to launch in 2018 to complement public transport and as an alternative to the private car. We are actively involved in public projects to help shape the framework conditions for the approval and introduction of our own self-driving system. The experience we are gathering here will benefit the Group brands and thus also our customers. As part of the joint involvement of our Group brands Volkswagen Passenger Cars, Audi and Porsche in the pan- European High-Power Charging (HPC) joint venture IONITY, a comprehensive charging infrastructure is being built to safeguard long-distance mobility: by 2020, it is planned to jointly build and operate fast-charging stations at 400 locations along major transport arteries in Europe. Volkswagen Commercial Vehicles launched the Urban Logistics project initiative in the reporting year together with universities and businesses. The project partners are bringing together a wealth of promising ideas such as intelligent connectivity, smart mobility solutions, digital communication and control technologies and the use of electricpowered delivery vehicles to create practical solutions for districts or whole cities. Our Material Research team plays a major role in the Open Hybrid LabFactory, a public-private partnership in which various industry and research partners work together to develop lightweight construction solutions for mass production. Given the growing importance of e-mobility, automotive lightweight construction is a key technology for future competitiveness. Less vehicle weight increases the range of electric vehicles.

145 Group Management Report Sustainable Value Enhancement 141 Key R&D figures In fiscal year 2017, we filed 6,566 (6,465) patent applications worldwide for employee inventions, around half of them in Germany. The fact that an increasing share of these patents is for cutting-edge fields impressively underscores our Company s innovative power. These fields include driver assistance systems and automation, connectivity, alternative drive systems and lightweight construction. The Automotive Division's total research and development costs in the reporting year were 3.9% lower than in the previous year; their percentage of the Automotive Division s sales revenue the R&D ratio came to 6.7 (7.3)%. Along with new models, the main focus was on the electrification of our vehicle portfolio, a more efficient range of engines and digitalization. The capitalization ratio was 40.0 (42.1)%. Research and development expenditure recognized in profit or loss in accordance with IFRSs increased to 11.6 (11.5) billion. As of December 31, 2017, our Research and Development departments including the equity-accounted Chinese joint ventures employed 49,316 people (+2.6%) Group-wide or 7.7% of the total headcount. RESEARCH AND DEVELOPMENT COSTS IN THE AUTOMOTIVE DIVISION million Total research and development costs 13,135 13,672 of which capitalized development costs 5,260 5,750 Capitalization ratio in % Amortization of capitalized development costs 3,734 3,587 Research and development costs recognized in profit or loss 11,609 11,509 Sales revenue 196, ,016 Total research and development costs 13,135 13,672 R&D ratio

146 142 Sustainable Value Enhancement Group Management Report PROCUREMENT In fiscal year 2017, the main task for Procurement was once again to safeguard the necessary supplies and to help create competitive, innovative products and optimize cost structures. We also continued to digitalize procurement processes and expand cooperation with suppliers under the Volkswagen FAST (Future Automotive Supply Tracks) initiative. Procurement strategy The Group-wide procurement strategy with the vision, TOGETHER best in customer value and cost, was put into operation in Six goals were agreed in consultation with the brands and regions: > Access to supplier innovations > Active cost structures > Forward-looking structures > People, expertise and attractiveness > Supply chain excellence > Group-wide synergies To achieve these goals, more than 100 measures had already been drawn up by the end of 2017 as part of the following initiatives and are now being implemented: > Value sourcing aims to systematically integrate suppliers into the development process from an early stage. > Greenfield costs refers to commercial and technical activities to optimize component costs. > Innovation & partnerships ensures that procurement is an integral part of the processes and decisions related to both topics. > Software is driving the necessary changes to processes, structures and competencies resulting from the purchase of software and its increasing importance to the Group s added value. > Digital supply chain encompasses an IT system integrating all core procurement processes into a single solution and forming the basis for a digital network including all procurement partners. > Sustainability supports the Group s objective of leading the automotive industry in this area, including the supply chain. > Employees, strong team, organization directs attention inward and lays the foundation for the strategy s success with flat hierarchies, freedom for employees and a culture of respect and trust. The first successes of these initiatives are already apparent. Integrating suppliers into several vehicle projects at an early stage, for example, has enabled faster achievement of material cost targets whilst also improving quality from the market and customer perspective. We have also ordered implementation of specific innovations for our products from several suppliers to enable customers to take advantage of them at an early stage. In addition, it was decided to separate hardware and software in the procurement processes and establish a new organizational division, Connectivity Procurement. The first pilot projects with new IT solutions were launched in 2017 as part of the Digital supply chain initiative. These are gradually being rolled out throughout the Group. Pilot projects to factor sustainability aspects into the contract award process have also already been initiated. Volkswagen FAST Supplier network as the basis for success FAST is the central initiative of Group procurement, introduced in 2015 with the aim of making the Volkswagen Group and its supply network future-proof. The goal of FAST is to successfully implement the key topics of innovation and globalization by involving suppliers at an earlier stage and more intensively. The FAST initiative enhances the quality and speed of collaboration with our key partners, and thus enables us to coordinate global strategies and points of technological focus even more closely. The common goal is to make impressive technologies available to our customers more quickly and to implement worldwide vehicle projects more effectively and efficiently. From 55 FAST suppliers in 2016, the network grew to 64 suppliers over the past fiscal year. We presented the Group s key topics and projects at the FAST Summit, which took place in the reporting year for the third time. In addition, at the FAST Forum, relevant decision makers discussed how FAST can be made even more effective for Volkswagen and suppliers. Digitalization of supply We are working systematically to implement a completely digitalized supply chain. This will help us to ensure supply, leverage synergies throughout the Group and become a leader in cost and innovation. We are therefore creating a shared database and using innovative technologies to enable efficient, networked collaboration in real time both within the Group and with our partners. Since the successful launch of our new Group business platform ONE KBP in April 2017, we have been working together with our suppliers on one platform. A cloud-based, Group-wide data strategy was also agreed in This will enable us to identify supply risks in the supply chain even faster in future. Structure of key procurement markets Our procurement is organized at global level, with a presence in the key markets around the world. This ensures that production materials, investments in property, plant and equipment, and services can be procured worldwide to the quality required on the best possible terms. Networking of

147 Group Management Report Sustainable Value Enhancement 143 the brands procurement organizations enables us to leverage synergies across the Group in the various procurement markets. In addition to the brands procurement units, the Volkswagen Group operates eight regional offices. In emerging markets, we identify and train local suppliers to generate cost advantages for all the Group s production sites. In familiar and established markets, the regional offices support access to the latest technologies and innovations. Supply situation for purchase parts and upstream materials Systematic avoidance of bottlenecks was a constant focus of procurement. Natural disasters such as earthquakes and tornadoes impacted the availability of upstream materials. We were able to avoid adverse impacts on the Group s production thanks to Group-wide management of capacity and demand. Management of purchase parts and suppliers Purchase parts management is a core component of the global procurement organization. With our experts in tools and industrialization, along with standardized processes and approaches, purchase parts management makes a substantial contribution to ensuring successful production start-ups for vehicles and powertrains all around the world. Against the backdrop of increased complexity in the automotive industry, we also help to safeguard supplies for series production. As part of the pre-production process, we simulate series production at suppliers to identify any gaps in production or quality at an early stage and take countermeasures. Purchase Parts Management works closely with Quality Assurance at the production sites and conducts multi-stage performance testing. Sustainability in supplier relationships Global compliance with sustainability standards in human rights, occupational safety, health and environmental protection and combating corruption is our basic requirement for successful collaboration with our suppliers. It is also a contractual stipulation of the underlying business relationship. We continuously enhanced the concept of sustainability in our supplier relationships in We have added detail to our Volkswagen Group requirements for sustainability in relations with business partners (Code of Conduct for Business Partners) concerning human rights and occupational safety and extended the reporting options for infringements by suppliers. Another focus in 2017 was to raise awareness of sustainability risks among Procurement staff and our suppliers and to inform them on options for averting risk. By the end of the reporting period, around 29,000 supplier locations had completed our online training program. In the Asia-Pacific, South America and European regions, among others, we also trained more than 700 employees at 356 suppliers in face-toface events on the topic of sustainability and informed them about region-specific challenges. In addition, we raised awareness of sustainability risks in the supply chain with face-to-face events for over 2,000 Procurement employees. We also substantially intensified our supplier checks in the reporting year with regard to sustainability. We commissioned sustainability audits from an external service provider at 321 suppliers. In 60 cases, the findings resulted in an action plan to improve the suppliers sustainability performance. In addition to these local audits, more than 25,000 supplier locations submitted a self-declaration on the topic of sustainability. In around 1,500 cases, their sustainability performance was improved through specific measures. Setting the course for the future In 2017, procurement was defined by vehicle connectivity and e-mobility, which have led to new groups of materials. The amount of software in our purchase parts is constantly increasing. Procurement is taking on an important role here with cost-effective structuring of licensing agreements and the standardization of software modules. We reacted early by pooling competencies to make our structure even more effective. PRODUCTION Our global, cross-brand production network safeguards the processes from the supplier to the factory and assembly line, and from the factory to dealers and customers. Enduring efficiency is a prerequisite for our competitiveness. We meet challenges of the future with holistic optimizations, pioneering innovations, flexible supply streams and structures, and an agile team. In fiscal year 2017, the global vehicle production volume surpassed the previous year s level and reached 10.9 million units. Productivity increased by around 5.9% year-on-year, despite the continuing difficult conditions in many markets.

148 144 Sustainable Value Enhancement Group Management Report Intelligently networked production strategy Production is supporting the future program TOGETHER Strategy 2025 with their intelligently networked functional area strategy. By intelligently connecting people, brands and machines, we aim to pool the strengths and potential of our global production and logistics and take advantage of the resulting synergy effects. We are guided in this by four goals: > Versatile production network > Efficient production > Intelligent production processes > Future-ready production We have used nine initiatives to create content clusters in which expert teams work on the strategic topics relevant for production in the Group. Examples include the competitive design of our global production network, the reduction and offsetting of environmental impact throughout the production process, and digitalization with its implications for production and working processes and for collaboration. The overarching aim is to increase productivity and profitability. With the production strategy, we have laid the foundations for the successful and sustainable enhancement of our production. We use regular reviews to ensure that we constantly adapt our activities to the current challenges. Global production network With twelve brands and 120 production locations, aspects such as consistent standards for product concepts, plants, operational equipment and production processes are key to forward-looking production. These standards enable us to achieve synergy effects, respond flexibly to market challenges, make optimal use of a flexible production network and realize multi-brand locations. Currently, almost half of the 40 passenger car locations are already multibrand locations. One example is the Bratislava site, which produces vehicles for the Volkswagen Passenger Cars, Audi, Porsche, SEAT and ŠKODA brands. We will add other multi-brand locations in future, for example, in Tianjin, China. The Volkswagen Group has set itself the goal of becoming one of the world s leading providers of battery-powered vehicles (BEV) by The basis for this is the introduction of the Modular Electric Toolkit (MEB), which we will use to expand our range with a new BEV family. In order to design multibrand projects and for e-mobility to be cost-effective in conjunction with existing concepts, it is important to make production highly flexible and efficient. Making maximum use of potential synergy effects is also a decisive factor for the success of future vehicle projects. Using common parts and concepts as well as identical production processes will enable reduced capital expenditure and provide the opportunity to better utilize existing capacities. The future will also see electric vehicle projects at multibrand locations such as Anting, China. We are constantly enhancing our production concepts and aligning them with new technologies. The targeting process anchored in our strategy serves to realize ambitious targets in individual projects as part of a cross-divisional approach. The components business is also helping to safeguard the Group s future with its own initiatives. With around 80,000 employees worldwide, it is an integral part of the Group and plays a central role particularly in the core competency of engines and transmissions. The components business has been reorganized within the Group as part of a Group initiative. The aim is to boost our competitiveness, optimize investment, raise our efficiency, make a major contribution to the trends of the future, enable a coordinated entry into e-mobility and develop new business areas. Production locations The Volkswagen Group s production network is comprised of 120 locations in which passenger cars, commercial vehicles and motorcycles, as well as powertrains and components are manufactured. With 71 locations, Europe remains our most important production region for vehicles and components. There are 28 sites in Germany alone. The Asia-Pacific region has 31 locations. We have five locations in North America and nine in South America. The Group operates four locations in Africa saw 62 production start-ups: 26 for new products and 36 for product upgrades and derivatives. Capacity utilization of the locations in the Volkswagen Group s production network is further enhanced by supplying them with complete knock-down (CKD) kits for local assembly.

149 Group Management Report Sustainable Value Enhancement 145 VEHICLE PRODUCTION LOCATIONS OF THE VOLKSWAGEN GROUP Share of total production 2017 in percent NORTH AMERICA 4 locations (7%) EUROPE 36 locations (49%) ASIA 18 locations (39%) SOUTH AMERICA 6 locations (4%) AFRICA 4 locations (1%) The Group s production system With our global Group production system, we aim to continuously and sustainably improve our production workflow at all the brands and regions locations. Our goal is to ensure the excellence of processes in production and productionrelated environments. We are increasing the amount of attention we give to further strengthening the Group s production system and increasing its presence. Leadership and individual responsibility are the foremost topics, embedded in a culture of appreciation and collaboration. A factory must work at optimal capacity so as to continue manufacturing high-quality products that give customers maximum benefits at competitive prices. This is made possible by the standardization of production processes and operating equipment at an early stage, based on the principle of socalled concept consistency. This ensures that common design principles, joining techniques and joining sequences, but also installation and connection concepts are applied in the brands development and production areas. The principle of concept consistency is fundamental for creating efficient logistics and manufacturing processes. New technologies and product innovations With our manufacturing technologies, we create Group products that fulfill the highest standards of functionality, quality and design. In recent years, for example, vehicles with multicolored paintwork have become popular, particularly those with color-contrasting roofs. Until now, this two-tone paintwork has required the vehicles to pass through the paint shop twice during production. Volkswagen is working with process partners in a joint project to develop a new technology that can significantly reduce the workload for multicolored designs. This technology was implemented for the first time in 2017 at the Pamplona site, initially for the new Polo. Other vehicles and locations are set to follow. In the foreseeable future, the Volkswagen Group will also be able to offer more individually customized paintwork than previously possible thanks to the availability of digital printing. Where the design and introduction of new production technologies are concerned, affected staff are involved in the redesign of workplaces and processes from the outset. This is an important prerequisite if new technologies and solutions are to find the necessary acceptance.

150 146 Sustainable Value Enhancement Group Management Report KEY ENVIRONMENTAL INDICATORS FOR PRODUCTION IN THE VOLKSWAGEN GROUP¹ ENERGY CONSUMPTION in kilowatt hours per vehicle CO2 EMISSIONS in kilograms per vehicle CO ,069 2,089 2, % ² , % ² VOC EMISSIONS³ in kilograms per vehicle VOC DISPOSABLE WASTE in kilograms per vehicle % ² % ² FRESH WATER CONSUMPTION in cubic meters per vehicle % ² 1 Production of passenger cars and light commercial vehicles. Prior-year figures adjusted. 2 Change 2017 as against Volatile organic compounds (VOCs). Environmentally efficient production One element of the production strategy is the environmentally exemplary production initiative. This involves us working on four key issues in the period leading up to 2025: > Setting and achieving ambitious environmental targets for production > Developing a long-term vision for environmental targets in production and rolling it out across the Group > Strengthening employees environmental awareness and integrating relevant environmental aspects into processes > Achieving top positions in renowned environmental rankings In this context, the Volkswagen Group has set itself the goal of reducing the five key environmental indicators of energy and water consumption, waste for disposal, and CO 2 and VOC emissions in production by 45% for each vehicle produced by 2025 starting from 2010 levels. This objective applies to all of the Group s production locations and is derived from our environmental requirements for production processes, which are anchored in the Group s environmental principles. The charts above show the development of these indicators. We are encouraging networking and communication between the brands worldwide in order to leverage synergies. Our environmental experts meet regularly in working groups; in addition, we train our employees on the topic of environmental protection. To identify and implement savings at the locations, the Environmental Task Force a team from Group Research Environment analyzes manufacturing processes, site infrastructure and resource and energy flows in production and evaluates their impact on the environment. With experience from more than 30 analyses, the team can systematically reinforce and spur on the transfer of measures. We record and catalog environmental measures in an IT system and make these available for a Group-wide exchange of best practices. In the reporting period, around 1,600 implemented measures in the area of environment and energy were documented in this system. They serve to improve infrastructure and production processes for passenger cars and light commercial vehicles. These activities are beneficial from an environmental and economic perspective.

151 Group Management Report Sustainable Value Enhancement 147 With a series of effective, innovative measures, we once again promoted the reduction of environmental indicators in the reporting period while at the same time improving production processes. The following examples show the extent to which the measures have contributed to strengthening production processes and achieving targets: One important lever for reducing energy consumption is tailoring the operation of all facilities according to demand. Improving ventilation in the halls at the Bratislava site has resulted in savings of 15,000 MWh and 200 tonnes of CO 2. Measures have also been implemented in energy generation and consumption. For example, five German locations switched to 100% CO 2 -free power in the reporting period. This is saving 165,000 tonnes of CO 2 per year at the Volkswagen Passenger Cars and Porsche brands. As part of an upgrade to the paint shop at Volkswagen de México, new electrostatic painting robots were installed. These have reduced paint consumption on the production lines by up to 19%, resulting in a VOC reduction of up to 152 tonnes per year. Green logistics Logistics is contributing to the Volkswagen Group s focus on the environment by analyzing the emissions of the entire transport chain. The Green Logistics initiative promotes alternative means of transport and sustainable, energyefficient transport systems, thereby reducing greenhouse gas emissions. Universal environmental principles were defined during the reporting period and used to create strategic guidelines and rules. These are designed to ensure that our environmental standards in logistics processes are implemented globally. In logistics, this means, for instance, avoiding transports, shifting goods to more environmentally friendly means of transport, or improving the implementation and use of modern technology and alternative drive systems. An important starting point for reducing CO 2 emissions is the selection of the mode of transport. One of the most efficient options in terms of transport capacity is maritime transport. To further improve the environmental sustainability of ship transport, Volkswagen Group logistics will put two charter ships powered by liquefied natural gas (LNG) into service in In September 2017, we held an LNG Truck Day to dispel doubts and reservations regarding the new technology and actively support the expansion of the LNG fuel station network in Germany. Among others, regional freight for- warders, gas providers and representatives from the German Federal Ministry of Transport and Digital Infrastructure and the Federal Ministry for Economic Affairs and Energy took part. In mid-2017, Volkswagen Sachsen GmbH s Zwickau plant and the Porsche factory in Leipzig presented fully electric, 40- tonne trucks suitable for highway driving. With automated driving functions, the vehicles are intended for short-cycle, on-time transport. Two trucks were fitted with electric drive systems and batteries in the ejit (electric-powered just-intime mobility) research project. The e-trucks reach a speed of 85 km/h and have a range of 70 km. SALES AND MARKETING As part of our future program, we have developed a sales and marketing strategy aimed at exciting customers on a whole new level under the slogan customer delight. We regard ourselves as an innovative and sustainable mobility provider for all commercial and private customers worldwide with a unique product portfolio encompassing twelve successful brands and innovative financial services. We will implement the TOGETHER sales strategy step by step over the coming years. In the focus area of new sales, for example, we are realizing innovative sales and service concepts together with our sales partners. In the focus area of the customer ecosystem, we are implementing platforms for a seamless and safe digital brand experience at all customer touchpoints this is enabling us to meet ever-growing customer expectations as well as increased data protection standards. In the focus area of steering, we are optimizing how our brands capitalize profitably on market opportunities. Optimal coverage of markets, customer segments and customer budgets are at the heart of a strategic Group initiative. To this end, we are establishing automobile-specific customer segmentation to steer the positioning of our brands. At the same time, we are examining global markets for potential revenue sources. In 2017, we rolled out this methodology in Europe and China and agreed on the regionspecific, customer-oriented brand territories for product positioning. Starting in 2018, the new methodology will be applied in the Volkswagen Group s product processes; other markets will also be included. Customer satisfaction and customer loyalty The Volkswagen Group aims its sales activities at exciting its customers. This is our top priority, as excited customers remain loyal to our brands and recommend our products and

152 148 Sustainable Value Enhancement Group Management Report services to others. In addition to satisfaction with our products and services, we value our customers emotional connection to our brands. It is important for us to retain customers and win new ones. To measure our success in this area, we collect data on and analyze three strategic indicators for the major passenger car-producing brands: > Net promoter score. Proportion of customers who would recommend us to others minus the proportion of customers who would not recommend us. In terms of customers willingness to recommend them, the Porsche and ŠKODA brands lead the core European markets when compared to other Group brands and competitors. > Loyalty rate. Proportion of customers of our car brands who have bought another Group model. The loyalty of Volkswagen Passenger Cars, Audi, Porsche and ŠKODA customers has kept these brands in the upper loyalty rankings in comparison with competitors for a number of years. Compared to other manufacturer groups, the Volkswagen Group therefore holds the top spot in terms of loyalty, with a considerable margin over the competition. > Conquest rate. Newly acquired passenger car customers as a proportion of all potential new customers. Here, too, we have a top ranking, primarily thanks to the good scores achieved by the Volkswagen Passenger Cars brand. In the core European markets, the downward trend in brand image and brand trust at the Volkswagen Passenger Cars brand following the diesel issue did not continue in Instead, the first signs of recovery were evident. Porsche remains in top position in the image ranking. We also use a strategic indicator to measure the satisfaction of customers with our products and services in the truck and bus business: > Customer satisfaction. In the markets relevant for the Volkswagen Group, we aim to be one of the industry leaders in terms of the satisfaction rate for our commercial vehicle brands. To evaluate these criteria, we use customer satisfaction studies, which delivered positive satisfaction figures in line with our targets in the reporting period. In the financial services business, we use two strategic indicators: > Customer satisfaction. In addition to looking at customer satisfaction with our products, we measure this by examining reviews of our service staff; both aspects are an indicator for our customer and service focus. The results continued their positive trend in To achieve our goal of very high customer satisfaction throughout the financial services business by 2025, we regularly evaluate what action is needed and how ideas can be shared and implemented across different countries. > Customer loyalty. Trust in and loyalty to our services rely on customer satisfaction with our product range and service. The loyalty scores that are regularly calculated based on product sales to our customers are currently impressive proof of customers trust in our financial services. Ambitious targets underscore the focus on customers and on fulfilling their needs at Volkswagen Financial Services. E-mobility and digitalization in Group Sales By 2025, as part of our Roadmap E, we aim to offer our customers around the world more than 80 new electric models, including around 50 pure battery-driven vehicles and 30 plug-in hybrids. This campaign will be complemented by vehicle-related, customer-focused offers, such as customized charging infrastructure solutions and mobile online services. This is turning the Volkswagen Group from an automotive manufacturer into a mobility service provider, posing completely new sales challenges. We are making highly targeted use of the opportunities of digitalization in sales. Our actions are guided by a clearly defined strategy that requires extensive cooperation between the brands to achieve the greatest possible synergies. Our aim here is to create a completely new product experience for our customers one which impresses with its seamless customer communications, from the initial interest in purchasing a vehicle, to servicing and ultimately to the sale of the used car. In the process, we are opening up new business models and opportunities in every aspect of the connected vehicle in particular with regard to mobility and other services. Vehicles are becoming an integral part of the customer s digital world of experience. We take great care to make all processes transparent so that customers always retain control of their own data. We also gear our internal processes and structures to the pace of digital innovation. The result is project teams operating across different business areas, new forms of cooperation, a more intensive relationship with the international start-up scene, a consolidation of venture capital expertise as a form of supporting innovative ideas and business models as well as new lean systems and cloud-based IT solutions. Fleet customer business Our business relationships with fleet customers are often long-term partnerships. In a volatile environment, this customer group guarantees more stable vehicle sales than the private customer segment. The Volkswagen Group has an established base of business fleet customers in Germany and the rest of Europe in

153 Group Management Report Sustainable Value Enhancement 149 particular. Our extensive product range enables us to satisfy their individual mobility needs from a single source. In fiscal year 2017, the share of fleet customers in total registrations in Germany remained stable at 14.1 (14.1)% amid a 2.7% growth in the market. The Volkswagen Group s share of this customer segment decreased to 44.7 (47.1)%. Outside Germany, we recorded growth in the Group s share of registrations by fleet customers in Europe to 25.2 (24.5)%. Overall, the Volkswagen Group s share in Europe remained constant at 28.9 (28.9)%. This shows that fleet customers still have considerable confidence in the Group. After Sales and Service In addition to individual service, the timely provision of genuine parts is essential in ensuring passenger car customer satisfaction in After Sales. The genuine parts supplied by our passenger cars brands and the expertise of the service centers represent the highest level of quality and ensure the safety and value retention of our customers vehicles. With our global after-sales network including more than 120 of our own warehouses, we ensure that almost all our authorized service facilities around the world can be supplied within 24 hours. We regard ourselves as a complete provider of all products and services relevant to customers in the after-sales business. Together with our partners, we ensure the worldwide mobility of our customers. The partner businesses offer the entire portfolio of services in all vehicle classes. We are continuously expanding our range of tailored services in order to improve convenience for our customers and increase customer satisfaction. Around the world, our commercial vehicles business also prides itself on products of the highest quality and on customer focus. Our range of trucks, buses and engines is complemented by services that guarantee fuel efficiency, reliability and good vehicle availability. The workshop service and service contracts offer customers a high degree of certainty, in addition to a high level of quality. We are reducing servicing times and costs with a view to reducing vehicles total operating costs and helping them retain their value. In the Power Engineering segment, we help our customers ensure the availability of machinery with MAN PrimeServ. The global network of more than 100 PrimeServ locations guarantees excellent customer focus and offers, among other things, replacement parts of genuine parts quality, qualified technical service and long-term maintenance contracts. GROUP QUALITY MANAGEMENT The quality of our products and services plays a key role in maintaining customer satisfaction. Customers are particularly satisfied and remain loyal when their expectations of a product or service are met or even exceeded. Appeal, reliability and service determine quality as it is perceived by the customer throughout the entire product experience. Our objective is to positively surprise and excite our customers in all areas and thus win them over with our outstanding quality. Strategy of Group Quality Management We embody outstanding quality and ensure dependable mobility for our customers worldwide this is the strategic goal that guides the work of Group Quality Management. Along with the brands quality organizations, Group Quality Management plays an active role at all stages of product creation and testing. Through this work, we make an important contribution to successful product start-ups, high customer satisfaction and low warranty and goodwill costs. We have further enhanced the Group Quality Management strategy as part of our future program TOGETHER Strategy Focal areas include digitalization, new technologies and business areas as well as uniform processes, methods and standards at all brands. Increasing progress in digitalization is also a major challenge for the Volkswagen Group: an increasing number of digital products and services are being developed and brought to market. To continue to ensure the familiar level of quality and safety amid this diversity, we must adapt our quality measures accordingly. The increase in functional diversity and complexity of driver assistance systems, extending all the way to autonomous vehicles, means that software is growing in scope. Here we need to enhance the methods we use to support selected critical features of software development and safeguard quality requirements. We are also taking advantage of the progress in digital technology to further optimize our own processes and structures. For example, we use virtual measurement technologies or big data analyses when vehicles on the market encounter quality problems.

154 150 Sustainable Value Enhancement Group Management Report In this context, Group Quality Management has further developed its strategy in consultation with the Group brands. This comprises the following four goals: > We will excite our customers with outstanding quality by understanding the features of the quality that resonates with them and implementing these in our products. > We will contribute to competitive products with optimal quality costs by ensuring robust processes, thereby reducing the expense involved in testing each vehicle. > In critical business processes, we will reinforce the principle of multiple-party verification and monitor achievement of milestones even more closely. > We will become an excellent employer by promoting every single employee s personal development even more intensively. To achieve our goals, we have been working on a total of 15 quality initiatives since mid All are focused on the topics that will be decisive to the future success of the quality organizations at the Volkswagen Group. Contributing to the Group s strategic indicators We use a strategic indicator to measure the contribution of Quality Management at the major passenger car-producing brands. > Tow-in 12 MIS. This figure shows the number of vehicles that need to be towed to a dealer per 1,000 vehicles after 12 months in service. It includes all Group vehicles categorized as tow-in by dealers in the German market. In the 2016 production year, the Volkswagen Group s tow-in statistics in the German market improved slightly compared with 2014 and Of the six brands featured, Volkswagen Passenger Cars, Audi and ŠKODA saw their performance improve, while the SEAT, Porsche and Volkswagen Commercial Vehicles brands recorded a slight downward trend. We also use a strategic indicator to measure our success for trucks and buses: > Claims per vehicle 12 MIS Truck. This figure incorporates the number of claims related to liability for material defects per 1,000 vehicles after 12 months in service. MAN and Scania each collect this data for their products from across the globe. Through systematic quality management, both brands continued to exhibit a downward trend in the reporting period. Legal and regulatory compliance The diesel issue showed that we must check the compliance of our products more intensively. We have therefore reinforced application of the principle of multiple-party verification which involves mutual support and control between the divisions and introduced important additional processes, including in software security. At the Volkswagen Passenger Cars brand, for example, the development of software will be accompanied by quality milestones from 2017: The principle of multiple-party verification safeguards the systems and components or parts that directly influence a vehicle s safety, type approval and functioning and therefore require increased vigilance. At the series production stage, we are working even harder to carry out conformity checks on our products with the participation of all business units involved and to perform assessments on this basis. This applies particularly to emissions and fuel consumption. We are also placing greater emphasis on our quality management system than before, reinforcing the processdriven approach Group-wide across all business areas. Quality management in the Volkswagen Group is based on the ISO 9001 standard: the requirements of this standard must be met to obtain the type approval for producing and selling our vehicles. We conducted numerous system audits in the reporting period to verify that our locations and brands comply with the requirements of the standard, which was revised in The major focus was on the risk assessment for non-compliance with agreed processes. To ensure that these and other new requirements as well as official regulations are implemented and complied with, Group Quality Management is available to support the quality management consultants. With these and other measures, Group Quality Management is helping to ensure that we not only meet all legal requirements imposed on us as a manufacturer, but that our products do as well. Observing regional requirements Our customers in the different regions of the world have very diverse needs as far as new vehicle models are concerned. Another important task of Group Quality Management is to identify and prioritize these regional factors so that they can be reflected in the development of new products and the production of established vehicle models together with other important criteria such as the quality of locally available fuel, road conditions, traffic density, country-specific usage patterns and, last but not least, local legislation. We mainly use market studies and customer surveys to determine region-specific customer requirements. The perceived quality of our vehicles must be at a level commensurate with that of our competitors. We therefore redesigned the vehicle audit during the reporting period and tailored it more closely to regional customer needs. Every brand works together with the individual regions to decide

155 Group Management Report Sustainable Value Enhancement 151 the responsibility of the brands and enables us to invest less in features that do not resonate with customers. To make the results comparable, consistent quality benchmarks apply across all markets and regions. For more than 40 years now, auditors have therefore been deployed around the world to ensure compliance with these benchmarks by carrying out an assessment from the customer s perspective of the vehicles that are ready for delivery. We continually revise the quality benchmarks on which such audits are based to adapt them to the changing requirements. EMPLOYEES BY CONTINENT in percent, as of December 31, 2017 Germany Rest of Europe America Africa Asia/Australia 45% 29% 9% 1% 16% EMPLOYEES The Volkswagen Group is one of the world s largest employers in the private sector. As of December 31, 2017, the Group, including the Chinese joint ventures, employed 642,292 people, 2.5% more than at the end of The ratio of Group employees in Germany to those abroad remained largely stable over the past year. At the end of 2017, 44.8 (44.9)% of employees worked in Germany. Human resources strategy and principles of the human resources policy With the new human resources strategy Empower to transform, the Group is continuing with key and successful approaches of its human resource management. These include the pronounced stakeholder focus in corporate governance, comprehensive participation rights for employees, outstanding training opportunities, the principle of longterm service through systematic employee retention and the aspiration to appropriately balance performance and remuneration. At the same time, the new human resources strategy is setting innovative trends. Hierarchies are being dismantled and modern forms of working such as agile working whereby most responsibility for the work organization is transferred to the teams are set to be expanded. In the future, cooperating robots will ease heavy physical work in factories and digital processes will simplify administration. The Company s human resources strategy is based on five overarching objectives: > The Volkswagen Group aims to be an excellent employer with all of its brands and companies worldwide. > Highly competent and dedicated employees strive for excellence in terms of innovation, added value and customer focus. > A sustainable work organization ensures optimal working conditions in factories and offices. > An exemplary corporate culture creates an open work climate that is characterized by mutual trust and collaboration. > The Company s human resources work is highly employeeoriented while also aiming for operational excellence and providing strategic value-added contributions. To implement its human resources strategy, the Volkswagen Group will roll out a Group-wide diversity management system, among other programs, in the course of Varying cultural conditions in the global markets and growing economic momentum demand from Volkswagen an everbroader range of experience, world views, problem solutions and product ideas. The diversity of our staff offers great potential for innovation in this area, which we aim to make better use of in future. Mandatory rules on the percentage of women in management, combined with targets for the internationalization of senior management, are at the heart of diversity management at Volkswagen. In line with its corporate strategy, the Volkswagen Group is also driving the transformation in other fields. For example, various cultural change initiatives are concerned with reinforcing flatter hierarchies, a more open form of collaboration and a greater focus on the big picture within the Company s divisions. The human resources development system was completely revised in 2017 and now offers more transparent paths into management based on greater individual responsibility. The Company s management principles were also revised and new criteria for appointments defined. TOGETHER Strategy 2025 is also accompanied by new strategic indicators. For the passenger car-producing brands, we compile and analyze the following information: > Internal employer attractiveness. The indicator is determined by asking respondents, as part of the Group-wide opinion survey, whether they perceive the respective company as an attractive employer. The target for 2025 is 89.1 out of a possible total of 100 index points. A score of 85.2 index points was achieved throughout the Group in the reporting period.

156 152 Sustainable Value Enhancement Group Management Report > External employer attractiveness. The ability to recruit top talent is of decisive importance, particularly in view of the Company s transformation into a world-leading provider of sustainable mobility solutions and the associated development of new business units. Once a year, we check the positioning of the major passenger car-producing brands on the labor markets for graduates and young professionals using of this strategic indicator. Rankings in surveys by renowned institutions, in which we aim to achieve top scores for all Group brands, serve as the basis for this. > Diversity index. As we establish diversity management across the Group, this strategic indicator for the active workforce is used worldwide to report the development of the proportion of women in management and the internationalization of senior management. In particular, it underpins the objective of the human resources strategy, which is aimed at contributing to an exemplary leadership and corporate culture. In 2017, the Group-wide percentage of women in management was 13.8%. We aim to achieve a target of 20.2% by We aim to increase the level of internationalization in senior management, the uppermost of our three management tiers, from 18.7% in the past fiscal year to 25.0% in In the truck and bus business, we look at the opinion survey and cross-brand exchange of employees to identify how well strategic targets are being achieved: > Opinion survey. The sentiment rating is used to determine the level of employee satisfaction and identification with the company. The sentiment rating is calculated as the average score from of all responses regularly submitted as part of the opinion survey. The result in 2017 was in line with the previous year s level. > Cross-brand exchange and rotation. The aim is to continuously intensify collaboration between the commercial vehicle brands. It is also designed to enable the creation of specialist and international networks. We use this indicator to analyze how many employees have worked at another brand through such rotation. An increasing number of staff took advantage of this personnel development opportunity in One strategic indicator has been defined for the financial services business: > External employer ranking. This involves taking part in an external benchmarking exercised every two to three years. The aim is to enhance working conditions and identify measures to become a top-20 employer by 2025, not just in Europe, but globally. Volkswagen Financial Services AG was most recently represented in various national and international best-employer rankings in In 12 th place, it was among the top European employers in the Great Place to Work employer competition. Training and professional development At Volkswagen, our capacity for innovation and competitiveness depends to a large extent on the commitment and knowledge of our staff. Training at Volkswagen is organized very systematically on the basis of the so-called vocational groups. A vocational group includes all employees whose tasks are based on similar technical skills and who require related expertise in order to perform their jobs. The skills profiles lay down the functional and interdisciplinary skills for each job and serve as an orientation for training measures. Volkswagen Group employees have access to a wide range of training measures from advanced training on general Company-related issues, to specific training within the individual vocational groups, to personal development programs. The educational opportunities and development programs at the Volkswagen Group enable staff to continue to develop throughout their working lives and constantly deepen their knowledge. In this process, they also learn from more experienced colleagues, who act as experts in the vocational group academies the learning centers of the vocational groups and pass on their knowledge to others. All training is based on the dual training principle, which combines learning theoretical content with practical experience on the job and by means of specific tasks. New technologies can usefully complement learning and the transfer of expertise. As the central training organization in the Group, the Volkswagen Group Academy incorporates this idea into different projects. One example of this is the

157 Group Management Report Sustainable Value Enhancement 153 Education Lab, where the Volkswagen Group Academy conducts training research and analyzes training trends, tests technologies at Volkswagen together with start-ups, thereby introducing new forms of skills development at the Company. Within the Volkswagen Group Academy, the AutoUni provides the Group with knowledge that is relevant for the future by integrating internal senior experts and collaborating with universities. Its events are offered as programs and as cooperative study modules in a blended learning format, which combines classroom training with online content, and are supplemented by lectures and conferences. Vocational training and cooperative education The core component of training at Volkswagen is vocational training or for young people eligible to enter university, cooperative education (dual study programs combining university studies with on-the-job training). As of the end of 2017, the Volkswagen Group had trained 19,207 young people in approximately 50 trades. Volkswagen has introduced the principle of dual vocational training at many of the Group s international locations over the past few years and is continuously working on improvements. Over three-quarters of all the Group s vocational trainees now learn their trade through dual vocational training. Once a year, Volkswagen honors its highest-achieving vocational trainees in the Group with the Best Apprentice Award. Volkswagen continues to assist in the professional development of young people at the start of their careers even after their vocational training has been completed. Talent groups, for example, are used to promote particularly talented young specialists. These two-year development and training programs accept the highest-achieving 10% of fully qualified vocational trainees at Volkswagen AG and the Zwickau site each year. Fully qualified vocational trainees also have the option to move to a Group company outside Germany for twelve months as part of the Wanderjahre (Year Abroad) program. In the reporting period, 31 Volkswagen Group locations in 17 countries took part in this development program. The AGEBI+ program was designed to promote fully qualified vocational trainees who are eligible for university, thus offering students the opportunity to combine practical experience with a degree program in subjects that are critical for Volkswagen s future. By joining the European Alliance for Apprenticeships in 2017, Volkswagen is also working to promote vocational training outside the Group. The European Alliance for Apprenticeships is a platform that brings together government departments from various countries with other key stakeholders such as businesses, social partners, professional bodies, vocational training providers and youth organizations. The common goal is to strengthen the quality, supply, image and mobility of apprenticeships in Europe. Development of university graduates Volkswagen offers two structured entry and development programs for university graduates and young professionals. In the StartUp Direct trainee program, graduate trainees gain an overview of the Company over a two-year period while working in their own department, and take part in supplementary training measures. University graduates interested in working internationally can participate in the 18-month StartUp Cross program. The aim of the program is to get to know the Company in all of its diversity and to build up a broad network. During the term of this program, young professionals become familiarized with several Volkswagen Passenger Cars locations in Germany and other countries by working in various functional areas. Both programs are supplemented by several weeks experience working in production. In 2017, Volkswagen AG hired a total of 89 graduate trainees as part of these programs, 30.3% of whom were women. Graduate trainee programs are also available at the Group s international locations such as ŠKODA in the Czech Republic or Scania in Sweden. In addition, the Volkswagen Group has been offering young engineers from Southern Europe, where unemployment especially among young academics remains a major problem, the opportunity to gain international work experience through the StartUp Europe trainee program since Volkswagen has designed this program for university graduates, who work for three months at a Group company in their home country followed by 21 months at a German Group company. PROPORTION OF WOMEN as of December 31 % Female employees Female vocational trainees Female graduate recruits Total management Management Senior management Top-Management Germany, excluding Scania, MAN and Porsche. 2 Volkswagen AG

158 154 Sustainable Value Enhancement Group Management Report Increasing attractiveness as an employer and target-groupspecific development programs A family-friendly human resources policy is a major component of Volkswagen s appeal as an employer and makes an important contribution to achieving greater gender equality. We are therefore working continuously to develop familyfriendly working-hour models and to further increase the proportion of women in management positions. In line with German law on the equal participation of women and men in leadership positions, Volkswagen AG is aiming to have a 13.0% proportion of women at the first management level and 16.9% at the second management level by the end of As of December 31, 2017, the proportion of women in the active workforce at the first level of management was 10.4 (9.8)% and at the second level of management it was 14.0 (13.5)%. Targets have been set for every board-level division in the company to encourage women with high potential in their decision to aim for a career in management in the Company. This approach is supported by many different measures including the cross-brand mentoring programs Mentoring Program Management, Compass and the Career with Children project. A large number of company regulations have come into effect at the Volkswagen Group in recent years to improve balancing the demands of work and home life and to allow for individual arrangements. These include flexible working hours, variable part-time work and shift models, leave of absence programs enabling employees to care for close family members, as well as childcare facilities that are close by and/or company-owned, and mobile working. At Volkswagen AG, which had entered into its works agreement for mobile working in 2016, more than 11,800 employees made use of this flexible working arrangement as of the end of the reporting period. Preventive healthcare and occupational safety Volkswagen s holistic healthcare management system extends beyond traditional preventive healthcare and occupational safety. It also covers work organization, workstation design, behavioral ergonomics, psychosocial aspects, rehabilitation and reintegration into working life as well as programs for preventing widespread diseases. To maintain and improve employees health, performance and fitness levels, a free and comprehensive voluntary screening, the Check-up, is provided for all employees at almost all production sites. Another important area for action at the Volkswagen Group is the ergonomic quality of the workstations. The Company is thus highly committed to continuously improving ergonomics along the entire production chain and in all work AGE STRUCTURE IN YEARS OF VOLKSWAGEN GROUP EMPLOYEES as of December 31, 2017; in percent < % 22% 28% 25% 19% 4% processes. To this end, we collaborate with scientific partners to combine state-of-the-art ergonomic workstations with innovative work processes. Employee participation Codetermination and employee participation are important pillars of our human resources strategy. Volkswagen aims to promote high levels of expertise and a strong sense of team spirit. This includes employees opinions, assessments and constructive criticism being heard. With the opinion survey, a uniform, Group-wide poll, the Company regularly gathers information regarding employee satisfaction. Based on the results, we then implement followup processes in which proposals for improvement are developed and monitored until implementation is complete. Over 570,000 employees from 156 locations and companies in 48 countries were invited to take part in the survey. The participation rate was 79%. The average result based on all responses that are regularly received through the opinion survey the sentiment rating is an important parameter in the opinion survey; in 2017 it stood at 78.3 out of a possible total of 100 index points. The score achieved was thus on a par with the previous year. Idea management is another important means of boosting employee engagement. Using their creativity, knowledge and initiative, our employees contribute their ideas for improvements to streamline workflows, further enhance ergonomics in the workplace, reduce costs and continuously increase efficiency. Idea management enables employees to participate actively in the planning and organizing of their work and is also underpinned by prizes with monetary incentives.

159 Group Management Report Sustainable Value Enhancement 155 INFORMATION TECHNOLOGY (IT) With digitalization and networking on the rise, all of our business processes must also be comprehensively provided with digital support. At the same time, the establishment of new locations is placing high demands on networking and coordination. A modern, tailor-made infrastructure and an efficient application landscape are needed to meet these requirements. Our Group-wide Production, Information and Control System (FIS) enables us to produce vehicles efficiently all around the world at the right time and with the right equipment. FIS is a key success factor for flexible, cross-brand manufacturing in the global production network. The growing convergence of different business areas and IT is opening up new opportunities. In production, for example, big data processes help us to analyze faulty machinery and take action at an early stage. Virtual concept vehicles make the product development process even faster and more efficient. Applied research in the field of intelligent humanrobot collaboration, and IT systems to control mobile assistive robotics and networked infrastructure (Internet of Things) are also important elements of the digitalization of production at the Volkswagen Group. The Company s internal network Group Connect helps to network all employees. The platform encourages the transfer of expertise and puts experts in touch with one another. The newly established IT City serves as the central location for the Group s own IT and digitalization expertise in Wolfsburg. The campus-style office complex has been systematically designed for agile working. In software development centers, we develop applications for a wealth of different uses, thereby maintaining comprehensive in-house expertise in the rapid, demand-oriented development of IT solutions. Safeguarding data and systems at the Volkswagen Group is another focus of our IT. Over the past fiscal year, we have continued to set up the Information Security Management Systems (ISMS). The Group offers documents, templates and tools to all Group companies and brands in the form of an ISMS toolbox to help them implement their own ISMS. The ISO standard is one component of this. The key information security processes have been audited and successfully certified within the ISO framework. This is the most important standard for information security and extends beyond IT to cover issues such as personal security, compliance, physical security and legal requirements. In 2015, Volkswagen AG co-founded the Deutsche Cyber- Sicherheitsorganisation GmbH (DCSO). DCSO aims to accu- mulate specialist knowledge on cybersecurity and become the preferred service provider to German businesses in this field. It conducts security audits and certifies key suppliers and technologies in order to help German companies (especially small and medium-sized enterprises) detect and defend themselves against cyber-attacks and predict them in future. This work also makes our supply chain more secure. Volkswagen is also capitalizing on digitalization at its inhouse IT labs in Wolfsburg, Munich, Berlin, San Francisco and Barcelona. Specialist departments of Group IT, research institutions and technology partners are working closely together at these innovation centers on future trends in information technology, such as artificial intelligence and machine learning, quantum computing, digital ecosystems, intelligent human-robot collaboration and smart mobility. These labs act as test laboratories for the Group, as centers of expertise for these future trends and as liaison offices for start-ups. They enable Volkswagen to experiment with new technologies outside the line organization. Here, the experience and strategic expertise of a large company like Volkswagen is combined with the pragmatism and speed of young start-ups. ENVIRONMENTAL STRATEGY Protecting the environment is one of four goals firmly anchored in our future program TOGETHER Strategy As a world-leading provider of sustainable mobility, we want to be a role model on environmental issues. We are working towards this goal, taking responsibility for the environment every single day. To this end, we have defined the following target areas: > To continuously improve our carbon footprint > To continuously reduce harmful emissions > To continuously reduce resource consumption We use the decarbonization index (DCI) as a strategic indicator to document our progress. This measures the products CO 2 emissions along the entire value chain. The DCI is calculated from the ratio of the carbon footprint to the number of vehicles produced. It encompasses both direct and indirect CO 2 emissions at the individual production sites (Scope 1 and 2) as well as all further CO 2 emissions over the life cycle of the vehicles sold from the extraction of raw materials, to vehicle use and final disposal (Scope 3). The DCI thus enables transparent, comprehensive tracking of progress toward climate-friendly mobility. We are currently defining the DCI target figures for 2025 together with the Volkswagen Group brands. These targets should then contribute to the achievement of the two-degree target in the

160 156 Sustainable Value Enhancement Group Management Report Paris Agreement adopted at the United Nations Climate Change Conference in late We are also calculating the environmental impact reduction production indicator. We have set a target for the Group and brands to reduce the environmental impact of production by 45% per vehicle compared with 2010 levels. This key figure includes energy and water consumption, CO 2 and VOC emissions and the volume of waste; the charts on page 146 show the development of these indicators. In striving to achieve our goal of becoming a role model, we consider the environmental impact throughout the entire product life cycle: from manufacturing (including the supply chain) to use and disposal. In addition to the global challenges of climate change, our approach looks at other important environmental resources, particularly water, soil, air, energy and raw materials. We use major sustainability ratings as our benchmark and aim to achieve top rankings in these. Organization of Environmental Protection The Group Board of Management is the highest internal decision-making authority on environmental matters. Since 2012, it has simultaneously functioned as the Group s Sustainability Board. The Group-wide management of environmental protection is the responsibility of the Group Steering Committee for the Environment and Energy, which is supported by numerous specialist bodies. The brands and companies are responsible for their own environmental organization. They base their own environmental policies on the targets, guidelines and principles that apply throughout the Group. The Group Steering Committee for the Environment and Energy coordinates the brands and companies. It reports on progress to the Board of Management. Environmental officers from throughout the Group meet regularly for the Group Environmental Conference in order to optimize the environmental focus along the entire value chain. Our production sites, including the central development areas, are certified in accordance with ISO or EMAS (100 of 120 production sites in 2017). Many production locations have also certified their energy management systems in accordance with ISO Since 2009, the integration of environmental aspects into the product development at the Volkswagen brand has also been certified in accordance with ISO TR in Development at the Volkswagen Passenger Cars brand. Biodiversity Biodiversity means the variety of life on our planet, and covers the variety of species, the genetic differences within species and the diversity of ecosystems. We rely on it as the basis for our continued existence: healthy food, clean water, fertile soils and a balanced climate. Due to the global decline in biodiversity, the United Nations has declared the current decade to be the UN Decade on Biodiversity. Volkswagen has been committed to protecting biodiversity since 2007 and is a founding member of the Biodiversity in Good Company e.v. initiative. In our mission statement, we have committed to supporting the protection of species at all of our locations. For this, we are collaborating with local suppliers. Our membership in Biodiversity in Good Company e.v. has been temporarily suspended as a result of the diesel issue. Protecting biodiversity is an integral part of our environmental management. We contribute to achieving the targets of the UN Convention on Biological Diversity (CBD) by reducing greenhouse gas emissions and utilizing resources as efficiently as possible. Volkswagen supports networking between the various players in the fields of business, politics, society and academia with a view to increasing public awareness of biodiversity conservation and to increase knowledge of the issue. SEPARATE NONFINANCIAL GROUP REPORT The combined separate nonfinancial report of Volkswagen AG and the Volkswagen Group in accordance with sections 289b and 315b Handelsgesetzbuch (HGB German Commercial Code) for fiscal year 2017 will be available on the website Bericht_2017_d.pdf in German and at in English by no later than April 30, REPORT ON POST-BALANCE SHEET DATE EVENTS There were no significant events after the end of fiscal year 2017.

161 Group Management Report Report on Expected Developments 157 Report on Expected Developments The global economy is expected to grow somewhat less strongly in 2018 than in the previous year. We assume that trends in global demand for vehicles will be mixed and that demand will increase at a slightly slower rate than in the reporting period. With its brand diversity, broad product range and pioneering technologies and services, the Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed conditions in regional markets. In the following, we describe the expected development of the Volkswagen Group and the general framework for its business activities. Risks and opportunities that could represent a departure from the forecast trends are presented in the Report on Risks and Opportunities. Our assumptions are based on current estimates by thirdparty institutions. These include economic research institutes, banks, multinational organizations and consulting firms. DEVELOPMENT OF THE GLOBAL ECONOMY In our forecasts, we assume that global economic growth will weaken slightly in We believe risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia s emerging economies. Furthermore, we anticipate that the global economy will also continue to grow in the period from 2019 to Europe/Other Markets In Western Europe, economic growth is expected to slow down in 2018 compared with the reporting period. Resolving structural problems poses a major challenge, as do the uncertain results and impacts of the Brexit negotiations between the EU and the United Kingdom. For Central Europe, we estimate that growth rates in 2018 will be lower than those of the past fiscal year. In Eastern Europe, the economic situation should stabilize further, providing that the smoldering conflict between Russia and Ukraine does not worsen. Following the increase in the past fiscal year, Russia s economic output is likely to grow further. Political uncertainty and social tensions resulting primarily from high unemployment levels will probably weigh on the South African economy in 2018 and are expected to keep growth down. Germany In Germany, gross domestic product (GDP) is likely to increase less strongly in 2018 than in the reporting period. However, the situation in the labor market is expected to remain stable and bolster consumer spending. North America We expect the economic situation in the USA to further improve in The US Federal Reserve is likely to implement additional interest rate hikes throughout the course of the year. At the same time, fiscal policy measures are intended to provide support. Growth in Canada is likely to weaken, while remaining nearly unchanged in Mexico. South America The economy in Brazil is very likely to stabilize further in 2018 and record somewhat higher growth than in the reporting period. Despite sustained high inflation, Argentina should achieve a similar increase in GDP to that recorded in the reporting period.

162 158 Report on Expected Developments Group Management Report Asia-Pacific In 2018, the Chinese economy is expected to continue growing at a relatively high level, but year-on-year this growth will lose momentum. For India, we anticipate an expansion rate at around the 2017 level. The economic situation in Japan is likely to deteriorate compared with the reporting period. TRENDS IN THE PASSENGER CAR MARKETS We expect trends in the passenger car markets in the individual regions to be mixed in Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. The Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed developments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, broad and selectively expanded product range, and pioneering technologies and services place us in a good competitive position worldwide. Our goal is to offer all customers mobility and innovations suited to their needs and thus ensuring longterm success. We expect that the growth in demand for passenger cars worldwide will continue in the years 2019 to Europe/Other Markets For 2018, we anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. The level recorded before the financial and debt crisis is unlikely to be achieved again in the medium term. The uncertain outcome of the exit negotiations between the EU and United Kingdom is likely to further exacerbate the continuing uncertainty among consumers precipitated by the financial and debt crisis, putting a damper on demand. In Italy and Spain, the recovery will probably continue in 2018 but at a considerably slower pace; in the French market, we expect growth to be only slightly positive. In the United Kingdom, we expect the market volume to fall moderately short of the previous year s high level. Passenger car demand in 2018 is expected to significantly exceed the prior-year figures in markets in Central and Eastern Europe. In Russia, the volume of demand will probably rise somewhat more strongly after the considerable recovery over the past fiscal year. We also expect to see further growth in demand in the other markets in this region. We are projecting that the volume of demand in the South African passenger car market in 2018 will be up slightly year-on-year. Germany Following the positive trend of recent years, we forecast that the market volume of the German passenger car market will remain on a level with the previous year in North America The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America as a whole and in the USA is likely to be slightly lower in 2018 than in the prior year. Demand will probably remain highest for models in the SUV and pickup segments. In Canada, the number of new registrations is projected to be slightly below the previous year s high level as well. In Mexico, we anticipate that demand will be unchanged year-on-year. South America Owing to their dependence on demand for raw materials, the South American markets for passenger cars and light commercial vehicles are heavily influenced by developments in the global economy. In addition, protectionist tendencies are adversely affecting the performance of the region s vehicle markets, especially in Brazil and Argentina, which have imposed restrictions on vehicle imports. Nevertheless, we expect demand in the South American markets as a whole to distinctly increase in 2018 compared with the previous year. In Brazil, South America s largest market, volume is likely to rise markedly again in 2018 after the strong increase in the past fiscal year. We anticipate that demand in the Argentinian market in 2018 will be perceptibly higher yearon-year. Asia-Pacific We believe that the passenger car markets in the Asia-Pacific region will continue their growth in 2018, albeit at a slower pace. In China, the increase in individual mobility requirements will push up demand, though the rate of growth is likely to be slightly slower than in the previous year. Strong demand is still forecast for attractively priced entry-level models in the SUV segment in particular. In India, we expect demand for passenger cars to moderately exceed the previous year s level. We anticipate that demand in the Japanese passenger car market will fall slightly in TRENDS IN THE MARKETS FOR COMMERCIAL VEHICLES We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in Overall, we expect a slight fall in demand in 2018, and a return to the growth trajectory for the years 2019 to Due to the uncertainty caused by the United Kingdom s European Union membership referendum in June 2016, we estimate that demand for light commercial vehicles in Western Europe in 2018 will be slightly below the previous year s level. The United Kingdom and Italy are expected to record a decline. We anticipate that registrations in Germany will be around the previous year s level.

163 Group Management Report Report on Expected Developments 159 In the Central and Eastern European markets, registrations of light commercial vehicles in 2018 will probably be perceptibly higher than in the previous year. In Russia, too, we expect the market volume to rise compared with In North and South America, the light vehicle market is reported as part of the passenger car market, which includes both passenger cars and light commercial vehicles. The market volume in the Asia-Pacific region in 2018 will probably record a slight year-on-year decline. We are also expecting demand in the Chinese market to fall short of the prior-year level. For India, we are forecasting a considerably higher volume in 2018 than in the reporting period. In the Japanese market, the downward trend is likely to continue at a slower pace. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group, new registrations in 2018 are set to be slightly up on the level seen in We anticipate a slightly positive trend for the period from 2019 to We assume that demand in Western Europe will taper off slightly year-on-year in In Germany, we expect the market to remain on a level with the previous year. Central and Eastern European markets should record a moderate increase in demand. In Russia, we anticipate a further recovery in demand in 2018, though the growth rate seen in 2017 will not be repeated. We believe that demand in the Brazilian market in 2018 will grow perceptibly from the low level of the previous year. This is due to the continuing economic recovery. In the bus markets that are relevant for the Volkswagen Group, we expect to see a slight increase in demand in We anticipate that demand in Western Europe over the same period will be on a level with that seen in For Central and Eastern Europe, we are forecasting higher demand than in the previous year. In Brazil, new registrations will probably be slighty higher than the prior-year level. For the period 2019 to 2022, we expect slight growth overall in the demand for buses in the markets that are relevant for the Volkswagen Group. TRENDS IN THE MARKETS FOR POWER ENGINEERING In 2018, we expect the market environment in power engineering to remain difficult, with undiminished competitive and price pressures. In 2018, the market volume for two-stroke engines used in merchant shipping is likely to slightly exceed the level seen in the reporting period. Calls for greater energy efficiency and low pollutant emissions will continue to have a significant influence on ship designs in the future. We also expect sustained high demand in the market for four-stroke engines used in cruise ships, ferries, dredgers and government vessels. In the offshore segment, new order volumes look set to be very low due to existing overcapacity, despite the recent slight rise in the oil price. Overall, we expect the marine market to be slightly up on the reporting period. The competitive pressure will continue unabated. Demand for energy correlates strongly with macroeconomic and demographic trends, especially in emerging markets. The global trend toward decentralized power stations and gas-based applications shows no sign of losing momentum. For 2018, we expect demand to be virtually steady but remain at a low level overall. In turbomachinery, we anticipate undiminished high price and competitive pressures in 2018 due to the continuing difficult market environment. This is due to expectations that unfavorable economic and political conditions will persist in some relevant markets. We believe that the trend has already bottomed out, however, and therefore expect the market for turbomachinery to return to slight growth in We anticipate a positive trend in the marine and power plant after-sales business for diesel engines in In turbomachinery, we expect a slight upward trend. For the period 2019 to 2022, we expect to see growing demand in the power engineering markets. The extent and timing of this growth will vary in the individual business fields, however. TRENDS IN THE MARKETS FOR FINANCIAL SERVICES We believe that automotive financial services will be very important for vehicle sales worldwide in We expect demand to continue rising in emerging markets where market penetration has so far been low, such as China. Regions with already developed automotive financial services markets will see a continuation of the trend towards enabling mobility at the lowest possible total costs. Integrated end-toend solutions, comprising mobility-related service modules such as insurance and innovative packages of services, will become increasingly important to this. Additionally, we expect demand to increase for new forms of mobility, such as carsharing, and for integrated mobility services including parking, refueling and charging. We anticipate that this trend will also continue in the period from 2019 to In the mid-sized and heavy commercial vehicles category, we expect rising demand for financial services products in

164 160 Report on Expected Developments Group Management Report emerging markets. There in particular, financing solutions support vehicle sales and are thus an essential component of the sales process. In the mature markets, we foresee increased demand for telematics services and services aimed at reducing total operating costs in This trend is also expected to continue in the period 2019 to EXCHANGE RATE TRENDS The global economy grew at an increased pace in Average energy and commodity prices were up year-on-year but remained at a relatively low level. The euro appreciated against the US dollar over the course of the year. Sterling lost further value against the European single currency due to uncertainty surrounding the exit negotiations began between the United Kingdom and the EU and the shape of future relations. The currencies of major emerging markets lost some further ground against the euro from the start of the reporting period. For 2018, we are forecasting that the euro will remain stable against the US dollar, sterling, Chinese renminbi and other key currencies. The expectation is that the Russian ruble, Brazilian real and Indian rupee will remain relatively weak. We currently assume that these trends will continue in the period 2019 to There is still a general event risk defined as the risk arising from unforeseen market developments. INTEREST RATE TRENDS Interest rates remained extremely low in fiscal year 2017 due to the continuation of expansionary monetary policy and the challenging overall economic environment. In the major Western industrialized nations, key interest rates persisted at a historic low level. While it became apparent in the USA that the extremely loose monetary policy was gradually drawing to an end, the European Central Bank continued to pursue this course. In light of further expansionary monetary policy measures in the eurozone, we therefore expect no more than a slight rise in interest rates in In the USA, however, we can expect to see a moderate increase in interest rates. For the period 2019 to 2022, we anticipate a gradual rise in interest rates, though the pace will vary from region to region. COMMODITY PRICE TRENDS Political and economic uncertainty in different forms caused the prices for many raw and input materials, such as crude oil, steel, cobalt and rare earths, to move sideways or upwards in 2017, amid high volatility in some cases. In light of these individual factors, we expect mixed developments in the commodity markets in 2018 with an increase in most commodity prices. We anticipate continued volatility in the commodity markets for the period from 2019 to Forward-looking, system-based and individual procurement methods enable us to limit risks arising from this volatility in commodity prices. Long-term supply agreements ensure that the Group s needs are satisfied and thus ensure a high degree of supply reliability. NEW MODELS IN 2018 In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market segments. We will unveil additional SUV models, integrate digitalization into our products even more systematically and provide important stimuli for the future with e-mobility offerings. The Volkswagen Passenger Cars brand will continue its global product initiative in The SUV range will be expanded further with the third generation of the Touareg among other models. The GTI family is also growing: with the new Polo GTI and the up! GTI, two models are coming on the market which will set new standards in their segment in terms of driving dynamics and sportiness. One of the focal points of the product offensive in 2018 will be China, where four new SUV models will be launched, including the compact, sporty T-Roc. With the Lavida and the Bora, important high-volume models will be revamped. These will stand alongside a series of new plug-in hybrid models and all-electric vehicles to meet the growing demand for new energy vehicles in China. In the USA, the new Jetta will come on the market. The latest generation of the US bestseller, which is now also based on the Modular Transverse Toolkit, is quite different from its predecessor, both visually and from a technological perspective. The Arteon, a saloon, will also follow in the course of the year. South America will see the rollout of the Virtus, a notchback saloon based on the Polo; the further rejuvenation and expansion of the product range is an important element of the brand s realignment in the region. Audi will set standards in the premium segment in 2018 with the new, progressive A7 Sportback. The four-door coupé reinvents the Gran Turismo with dynamic lines, systematic digitalization, a sporty driving experience and flexible use of space. The A4 family will gain a sporty spearhead: the new Audi RS 4 Avant combines high performance with enormous everyday practicality. The versatile Audi A6 featuring a sporty design will also come on the market. Boasting the same qualities as the A7, it has a much bigger interior than its predecessor. A new segment in the premium class will be

165 Group Management Report Report on Expected Developments 161 carved out with the latest member of the Q family, the Q8. The Audi e-tron will be Audi s first SUV with an all-electric drive to go into series production. ŠKODA will bring its updated compact car, the Fabia, to market. The SEAT brand will continue its product offensive with a large, seven-seater SUV. The model fits perfectly into SEAT s SUV model range alongside the smaller Arona and Ateca. In addition, SEAT is establishing the new sporty line CUPRA and will launch the dynamic CUPRA Ateca at the end of the year. Porsche is enhancing its 911 product range with the 911 Carrera T and will unveil the new 911 GT3 RS. Bentley will begin delivery in 2018 of the third generation of the Continental GT, which sets new standards for luxury grand touring. Bentley will also present two new derivatives of the successful Bentayga: the Bentayga V8 and Bentayga Hybrid. Lamborghini will launch a third series on the market with the Urus, a super-suv. The Huracán Performante Spyder will also be gradually made available. The Aventador S Roadster will receive an upgrade. Bugatti will provide additional options for its super sports car, the Chiron. Volkswagen Commercial Vehicles will debut the Amarok V6 TDI with the new top-of-the-range engine and the batterypowered e-crafter in In 2018, Scania will unveil further products from its new generation of trucks along with new services. MAN will present a new version of its Adaptive Cruise Control (ACC) for its range of trucks, featuring a stop-and-go function. Ducati will launch five new models on the market in 2018, including the Ducati Panigale V4 and the Multistrada STRATEGIC SALES FOCUS The multibrand structure, comprising largely independent, differentiated brands that nevertheless achieve maximum synergies, is one of the defining features of the Volkswagen Group. To enable Group brands to enter into new markets, we will further refine our brand positioning, particularly in the growth regions. We will also significantly enhance our customer focus. We will improve collaboration with our authorized dealers, train our staff including with respect to the digital transformation and invest in innovative processes and systems for seamless customer interaction in an increasingly digital environment. Our sales strategy is especially focussed on further developing the new and used vehicle businesses, on financial services and on business with original parts and accessories. We are also adding to our range of mobility services. TECHNICAL EXPERTISE AND MOTIVATION IN THE TRANSFORMATION PROCESS Our staff s dedication and high level of expertise provide important prerequisites to successfully shape the transformation process to becoming one of the world s leading providers of sustainable mobility, while ensuring our professional excellence in the field of traditional automobile manufacturing. The dual vocational training and dual study programs form the basis for professional development in the vocational groups at Volkswagen. Employees then obtain further qualifications throughout their working lives. To always meet current requirements, the broad range of training courses is continuously being enhanced. For example, employees are prepared for the changes associated with the advancing digitalization and the use of new technologies under Industry 4.0. An important principle in these efforts is the transfer of knowledge and experience from internal experts to other staff. Training is provided in the form of dual vocational training that closely integrates theoretical and practical forms of learning. INVESTMENT AND FINANCIAL PLANNING To continue to build on our pronounced strengths in innovation and technology, we will vigorously invest in e-mobility, autonomous driving, new mobility services and digitalization in the coming years. The largest share of the investments will be in the development of vehicles with hybrid or all-electric drives. In our current planning for 2018, the majority of capex (investments in property, plant and equipment, investment property and intangible assets, excluding capitalized development costs) will be spent on new products and the continued rollout and further development of the modular toolkit. The focus is on the electrification and digitalization of our vehicles, in particular through the development of the Modular Electric Toolkit (MEB). At the same time, primarily the SUV range will be further expanded. We expect the Automotive Division s ratio of capex to sales revenue to be in the range of %. Besides capex, investing activities will include additions to capitalized development costs. Among other things, these reflect upfront expenditures in connection with the fulfillment of environmental standards and the electrification and updating of our model range. The investments in our facilities and models, as well as in the development of alternative drives and modular toolkits, are laying the foundations for profitable, sustainable growth at Volkswagen. These investments also include commitments arising from decisions taken in previous fiscal years.

166 162 Report on Expected Developments Group Management Report We aim to finance the investments in our Automotive Division from our own capital resources and expect cash flows from operating activities to exceed the Automotive Division s investment requirements. Cash outflows resulting from the diesel issue will impact on the cash flow again in 2018, but will be substantially lower than in the reporting period. Consequently, we anticipate a positive net cash flow for 2018 that will be up significantly on the prior-year figure. These plans are based on the Volkswagen Group s current structures. They do not take into account the possible settlement payable to other shareholders associated with the control and profit and loss transfer agreement with MAN SE. Our joint ventures in China are included using the equity method and are therefore not included in the above figures. In 2018, these joint ventures plan higher investments in capex than in 2017, which will be financed from the companies own funds. In the Financial Services Division, we are planning slightly higher investments in 2018 than in the previous year. We expect the growth in lease assets and in receivables from leasing, customer and dealer financing to lead to funds tied up in working capital, of which around 45% will be financed from the gross cash flow. As is common in the sector, the remaining funds needed will be met primarily through unsecured bonds on the money and capital markets, assetbacked securities, customer deposits from direct banking business, as well as through the use of international credit lines. TARGETS FOR VALUE-BASED MANAGEMENT Based on long-term interest rates derived from the capital market and the target capital structure (fair value of equity to debt = 2:1), the minimum required rate of return on invested capital defined for the Automotive Division remains unchanged at 9%. In spite of the adverse effects of the special items on earnings, we exceeded the minimum rate of return on invested capital in the reporting period, with a return on investment (ROI) of 12.1 (8.2)% (see also page 128). Invested capital will increase in 2018 as a result of investments in new models, in the development of alternative drives and modular toolkits and in future technologies. The return on investment will probably exceed our minimum required rate of return on invested capital and be up slightly year-on-year. FUTURE ORGANIZATIONAL STRUCTURE OF THE GROUP As part of our future program TOGETHER Strategy 2025, we are establishing a new mobility solutions business with which we will drive our transformation into one of the world s leading providers of sustainable mobility. Development of mobility services is closely tied to the cutting-edge fields of digitalization, e-mobility, networked vehicle concepts and autonomous driving, which are being driven forward by our brands independently or in partnership with others. Starting in fiscal year 2018, we will report the mobility solutions business in the Automotive Division. SUMMARY OF EXPECTED DEVELOPMENTS The Volkswagen Group s Board of Management expects the global economy to record slightly weaker growth in We believe risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia s emerging economies. The trend in the automotive industry closely follows global economic developments. We assume that competition in the international automotive markets will intensify further. We expect trends in the passenger car markets in the individual regions to be mixed in Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. We anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. In the German passenger car market, we estimate that the market volume will be on a level with the previous year. Passenger car demand is expected to substantially exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect demand in the South American markets for passenger cars and light commercial vehicles to grow perceptibly as a whole compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory in 2018, albeit at a weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in Overall, we envisage a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2018 are set to rise slightly above the prior-year level. We believe that automotive financial services will continue to be very important for vehicle sales worldwide in The Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed developments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, our broad,

167 Group Management Report Report on Expected Developments 163 selectively expanded product range and pioneering technologies and services place us in a good competitive position worldwide. In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market segments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new technologies and our toolkits. The Group s new structure with more decentralized responsibility will strengthen our brands and regions and increase our proximity to customers. Our goal is to offer all customers mobility and innovations that are suited to their needs, ensuring long-term success. We will unveil additional SUV models, integrate digitalization into our products even more systematically and provide important stimuli for the future with e-mobility offerings. We expect that deliveries to customers of the Volkswagen Group in 2018 will moderately exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, exchange rate volatility and the diesel issue. In the EU, there is also a new, more time-consuming test procedure for determining pollutant and CO 2 emissions as well as fuel consumption in passenger cars and light commercial vehicles known as the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). We expect the sales revenues of the Volkswagen Group and its business areas to grow by as much as 5% year-on-year. In terms of the operating profit for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of % in For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between 5.0 and 6.0%. In the Power Engineering Business Area, we expect a lower operating loss than in the previous year. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. In the Automotive Division, the R&D ratio and the ratio of capex to sales revenue will fluctuate in the range of % in Cash outflows resulting from the diesel issue will negatively impact the cash flow again in 2018, but will be substantially lower than in the reporting period. Consequently, we anticipate a positive net cash flow for 2018 that will be up significantly on the prior-year figure. Net liquidity will also increase moderately as a result. The return on investment (ROI) will be slightly higher than in the previous year. Our unchanged stated goal is to continue our solid liquidity policy. The commitment and considerable technical expertise of our staff are key prerequisites to successfully shaping the transformation into the world's leading provider of sustainable mobility. With our future program, TOGETHER Strategy 2025, we are attaching even greater importance to our responsibility in relation to the environment, safety and society. We are also aiming for operational excellence in all business processes and intensifying our focus on profitable growth.

168 164 Report on Risks and Opportunities Group Management Report Report on Risks and Opportunities (CONTAINS THE REPORT IN ACCORDANCE WITH SECTION 289(5) OF THE HGB) Promptly identifying the risks and opportunities arising from our operating activities and taking a forward-looking approach to managing them is crucial to our Company s long-term success. A comprehensive risk management and internal control system help the Volkswagen Group deal with risks in a responsible manner. In this section, we first explain the objective and structure of the Volkswagen Group s risk management system (RMS) and internal control system (ICS) and describe these systems with regard to the financial reporting process. We then outline the main risks and opportunities arising in our business activities. OBJECTIVE OF THE RISK MANAGEMENT SYSTEM AND INTERNAL CONTROL SYSTEM AT VOLKSWAGEN Only by promptly identifying, accurately assessing and effectively and efficiently managing the risks and opportunities arising from our business activities can we ensure the Volkswagen Group s sustainable success. The aim of the RMS/ICS is to identify potential risks at an early stage so that suitable countermeasures can be taken to avert the threat of loss to the Company, and any risks that might jeopardize its continued existence can be ruled out. Assessing the probability and extent of future events and developments is, by its nature, subject to uncertainty. We are therefore aware that even the best RMS cannot foresee all potential risks and even the best ICS can never completely prevent irregular acts. STRUCTURE OF THE RISK MANAGEMENT SYSTEM AND INTERNAL CONTROL SYSTEM AT VOLKSWAGEN The organizational design of the Volkswagen Group s RMS/ ICS is based on the internationally recognized COSO framework for enterprise risk management (COSO: Committee of Sponsoring Organizations of the Treadway Commission). Structuring the RMS/ICS in accordance with the COSO frame- work for enterprise risk management ensures that potential risk areas are covered in full. In the reporting period, Volkswagen again took an approach to risk management that combines aspects of the ICS and the compliance management system (CMS). Uniform Group principles are used as the basis for managing risks in a standardised manner. Opportunities are not recorded. With this approach, we not only fulfil legal requirements, particularly with regard to the financial reporting process, but are also able to manage significant risks to the Group holistically, i.e. by incorporating both tangible and intangible criteria. The open approach to dealing with risks in the Company and the quarterly reporting on the current risk situation were focal points in the reporting period in addition to the ad hoc and annual risk assessment. We continued to reinforce the internal control system in the area of product compliance in This includes the implementation of what are known as the Golden Rules in the areas of control unit software development, emission classification and escalation management. These rules represent minimum requirements in the organization, processes and tools & systems categories. They serve to shore up governance and compliance. Another key element of the RMS/ICS at Volkswagen is the three lines of defense model, a basic element required, among other bodies, by the European Confederation of Institutes of Internal Auditing (ECIIA). In line with this model, the Volkswagen Group s RMS/ICS has three lines of defense that are designed to protect the Company from significant risks occurring.

169 Group Management Report Report on Risks and Opportunities 165 THE THREE LINES OF DEFENSE MODEL Companies and business units SUPERVISORY BOARD BOARD OF MANAGEMENT 1 st 2 nd 3 rd line of defense line of defense Group Risk Management line of defense Group Internal Audit First line of defense: operational risk management The primary line of defense comprises the operational risk management and internal control systems at the individual Group companies and business units. The RMS/ICS is an integral part of the Volkswagen Group s structure and workflows. Events that may give rise to risk are identified and assessed locally in the divisions and at the investees. Countermeasures are introduced immediately, their effects are assessed and the information is incorporated into the planning in a timely manner. The results of the operational risk management process are incorporated into budget planning and financial control on an ongoing basis. The targets agreed in the budget planning rounds are continually reviewed in revolving planning updates. At the same time, the results of risk mitigation measures that have already been taken are incorporated into the monthly forecasts on further business development without delay. This means that the Board of Management also has access to an overall picture of the current risk situation via the documented reporting channels during the year. The minimum requirements for the operational risk management and internal control system are set out for the entire Group in uniform guidelines. These also include a process for the timely reporting of material risks. Second line of defense: identifying and reporting systemic and current risks using Group-wide processes In addition to the ongoing operational risk management, the Group Risk Management department each year sends standardized surveys on the risk situation and the effectiveness of the RMS/ICS to the significant Group companies and units worldwide (regular Governance, Risk & Compliance (GRC) process). The feedback is used to update the overall picture of the potential risk situation and assess the effectiveness of the system. Each systemic risk reported is assessed using the expected likelihood of occurrence and various risk criteria (financial and nonfinancial). In addition, the measures taken to manage and control risk are documented at management level. This means that risks are assessed in the context of any risk management measures initiated, i.e. in a net analysis. In addition to strategic, operational and reporting risks, risks arising from potential compliance violations are also integrated into this process. Moreover, the effectiveness of key risk management and control measures is tested and any weaknesses identified in the process are reported and rectified. All Group companies and units selected from among the entities in the consolidated Group on the basis of materiality and risk criteria were subject to the regular GRC process in fiscal year In addition to the ad hoc and annual risk assessment, the Board of Management also receives quarterly risk reports. Similar to the annual standard GRC process, the assessment takes risk-minimizing control measures into account (net assessment). All Group brands are included in this process along with Volkswagen Financial Services AG and Volkswagen Bank GmbH. Information on relevant systemic and current risks is regularly reported to the Group Board of Management and the Audit Committee of the Supervisory Board of Volkswagen AG. The Group Board of Management Committee for Risk Management was set up in the reporting period. The new committee has the following tasks, among others: > to further increase transparency in relation to significant risks to the Group and their management, > to explain specific issues where these constitute a significant risk to the Group, > to make recommendations on the further development of the RMS/ICS, > to support the open approach to dealing with risks and promote an open risk culture. In the past, the Scania brand was not yet included in the Volkswagen Group s risk management system due to various provisions of Swedish company law. Scania has been integrated into quarterly risk reporting since From 2018, it will also be gradually included in the standard GRC process. Risk management and risk assessment are integral parts of Scania s corporate management. Risk areas at Scania are evaluated by the brand s Controlling department and reflected in the financial reporting.

170 166 Report on Risks and Opportunities Group Management Report ANNUAL STANDARD GOVERNANCE, RISK AND COMPLIANCE PROCESS Follow-up activities targeting weaknesses Selection of companies and units Data identified/ assessed in the units and Volkswagen Versicherung AG as an insurance company are subject to supervision by the relevant division of the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin the German Federal Financial Supervisory Authority). As part of the scheduled supervisory process and unscheduled audits, the competent supervisory authority assesses whether the requirements, strategies, processes and mechanisms ensure solid risk management and solid risk cover. Furthermore, the Prüfungsverband deutscher Banken (Auditing Association of German Banks) audits Volkswagen Bank GmbH from time to time. Reporting Documentation of effectiveness in the units Third line of defense: checks by Group Internal Audit Group Internal Audit helps the Board of Management to monitor the various divisions and corporate units within the Group. It regularly checks the risk early warning system and the structure and implementation of the RMS/ICS and the CMS as part of its independent audit procedures. RISK EARLY WARNING SYSTEM IN LINE WITH THE KONTRAG The Company s risk situation is ascertained, assessed and documented in accordance with the requirements of the Gesetz zur Kontrolle und Transparenz im Unternehmensbereich (KonTraG German Act on Control and Transparency in Business). The requirements for a risk early warning system are met through the elements of the RMS/ICS described above (first and second lines of defense). Independently of this, the external auditors check both the processes and procedures implemented in this respect and the adequacy of the documentation on an annual basis. The plausibility and adequacy of the risk reports are examined on a random basis in detailed interviews with the divisions and companies concerned that also involve the external auditors. The latter assessed our risk early warning system based on this volume of data and ascertained that the risks identified were presented and communicated accurately. The risk early warning system meets the requirements of the KonTraG. In addition, scheduled examinations as part of the audit of the annual financial statements are conducted at companies in the Financial Services Division. As a credit institution, Volkswagen Bank GmbH, including its subsidiaries, is subject to supervision by the European Central Bank, while Volkswagen Leasing GmbH as a financial services institution Monitoring the effectiveness of the risk management system and the internal control system To ensure its effectiveness, the RMS/ICS is regularly optimized as part of our continuous monitoring and improvement processes. In the process, equal consideration is given to both internal and external requirements. External experts assist in the continuous enhancement of our RMS/ICS on a case-by-case basis. The results culminate in both regular and event-driven reporting to the Board of Management and Supervisory Board of Volkswagen AG. THE RISK MANAGEMENT AND INTEGRATED INTERNAL CONTROL SYSTEM IN THE CONTEXT OF THE FINANCIAL REPORTING PROCESS The accounting-related part of the RMS/ICS that is relevant for the financial statements of Volkswagen AG and the Volkswagen Group as well as its subsidiaries comprises measures that are intended to ensure the complete, accurate and timely transmission of the information required for the preparation of the financial statements of Volkswagen AG, the consolidated financial statements and the combined Group management report. These measures are designed to minimize the risk of material misstatement in the accounts and in the external reporting. Main features of the risk management and integrated internal control system relevant for the financial reporting process The Volkswagen Group s accounting is essentially organized along decentralized lines. For the most part, accounting duties are performed by the consolidated companies themselves or entrusted to the Group s shared service centers. In principle, the audited financial statements of Volkswagen AG and its subsidiaries prepared in accordance with IFRSs and the Volkswagen IFRS accounting manual are transmitted to the Group in encrypted form. A standard market product is used for encryption. The Volkswagen IFRS accounting manual, which has been prepared using external expert opinions in certain cases, ensures the application of uniform accounting policies based on the requirements applicable to the parent. In particular, it

171 Group Management Report Report on Risks and Opportunities 167 includes more detailed guidance on the application of legal requirements and industry-specific issues. Components of the reporting packages required to be prepared by the Group companies are also set out in detail there and requirements established for the presentation and settlement of intragroup transactions and the balance reconciliation process that builds on this. Control activities at Group level include analyzing and, if necessary, adjusting the data reported in the financial statements presented by the subsidiaries, taking into account the reports submitted by the auditors and the outcome of the meetings on the financial statements with representatives of the individual companies. These discussions address both the reasonableness of the single-entity financial statements and specific significant issues at the subsidiaries. Alongside reasonableness reviews, other control mechanisms applied during the preparation of the single-entity and consolidated financial statements of Volkswagen AG include the clear delineation of areas of responsibility and the application of the dual control principle. The Group management report is prepared in accordance with the applicable requirements and regulations centrally but with the involvement of and in consultation with the Group units and companies. In addition, the accounting-related internal control system is independently reviewed by Group Internal Audit in Germany and abroad. Integrated consolidation and planning system The Volkswagen consolidation and corporate management system (VoKUs) enables the Volkswagen Group to consolidate and analyze both Financial Reporting s backward-looking data and Controlling s budget data. VoKUs offers centralized master data management, uniform reporting, an authorization concept and maximum flexibility with regard to changes to the legal environment, providing a future-proof technical platform that benefits Group Financial Reporting and Group Controlling in equal measure. To verify data consistency, VoKUs has a multi-level validation system that primarily checks content plausibility between the balance sheet, the income statement and the notes. RISKS AND OPPORTUNITIES In this section, we outline the significant risks and opportunities that arise in the course of our business activities. We have grouped them into categories. Unless explicitly mentioned, there were no material changes to the specific risks and opportunities compared with the previous year. The increasing number of partnerships generates both opportunities as well as risks. The diesel issue gives rise to its own risks for the Volkswagen Group and also has an impact on existing risks. These are described under the respective risk category. We use competitive and environmental analyses and market studies to identify not only risks but also opportunities with a positive impact on the design of our products, the efficiency with which they are produced, their success in the market and our cost structure. Where they can be assessed, risks and opportunities that we expect to occur are already reflected in our medium-term planning and our forecast. The following therefore reports on internal and external developments as risks and opportunities that may result in a negative or positive deviation from our forecast. Risks from the diesel issue The Volkswagen Group has recognized provisions arising from the diesel issue, in particular for the service measures, recalls and customer-related measures as well as for legal risks, but also for residual value risks. Further significant financial liabilities may emerge due to existing estimation risks particularly from legal risks, such as criminal, administrative and civil proceedings, technical solutions, lower market prices, repurchase obligations and customer-related measures. Demand may decrease possibly exacerbated by a loss of reputation or insufficient communication. Other potential consequences include lower margins in the new and used car businesses and a temporary increase in funds tied up in working capital. The funding needed to cover the risks may lead to assets having to be sold due to the situation and equivalent proceeds for them not being achieved as a result. As a result of the diesel issue, the ability to use refinancing instruments may possibly be restricted or precluded for the Volkswagen Group. A downgrade of the Company s rating could adversely affect the terms associated with the Volkswagen Group s borrowings. We are cooperating with all the responsible authorities to clarify these matters completely and transparently. Additional information about the litigation can be found on pages 93 and 178 to 185 of this annual report. Macroeconomic risks and opportunities We believe that the risks to continued global economic growth arise primarily from turbulence in the financial markets, protectionist tendencies and structural deficits, which

172 168 Report on Risks and Opportunities Group Management Report pose a threat to the performance of individual advanced economies and emerging markets. The worldwide transition from an expansionary monetary policy into a more restrictive one also presents risks for the macroeconomic environment. Moreover, uncertainty is associated with the effects of the UK s planned withdrawal from the EU. Persistently high private- and public-sector debt in many places is also clouding the outlook for growth and may cause markets to respond negatively. Declines in growth in key countries and regions often have an immediate impact on the state of the global economy and therefore pose a central risk. The economic development of some emerging economies is being hampered primarily by dependence on energy and commodity prices, capital inflows and socio-political tensions. Corruption, inadequate government structures and a lack of legal certainty also pose risks. Geopolitical tensions and conflicts are a further major risk to the performance of individual economies and regions. As the global economy becomes increasingly interconnected, it is also vulnerable to local developments. Any escalation of the conflicts in Eastern Europe, the Middle East, or Africa, for example, could cause upheaval on the global energy and commodity markets and exacerbate migration trends. An aggravation of the situation in East Asia could put further strain on the global economy. The same applies to armed conflicts, terrorist activities and the spread of infectious diseases, which may prompt unexpected, short-term responses from the markets. On the whole, we do not anticipate a global recession next year. Due to the risk factors mentioned, however, a decline in global economic growth or a period of below-average growth rates is possible. The macroeconomic environment may also give rise to opportunities for the Volkswagen Group if actual developments differ in a positive way from expected developments. Sector-specific risks and market opportunities The growth markets of Asia, South America, and Central and Eastern Europe are particularly important to the Volkswagen Group in terms of the global trend in demand for passenger cars and commercial vehicles. These markets harbor considerable potential; however, the underlying conditions in some countries in these regions make it difficult to increase unit sales figures there. Some have high customs barriers or minimum local content requirements for production, for example. The political crisis and its economic consequences again inhibited market development in Russia in fiscal year In South America, structural deficits continued to have a negative impact. Restrictions on vehicle registrations could enter into force in further Chinese metropolitan areas in the future. In Europe, there is a risk that some municipalities and cities will impose a driving ban on diesel vehicles in order to comply with emission limits. Also, a global economic slowdown could negatively impact consumer confidence. Furthermore, we cannot entirely rule out the possibility of freight deliveries being shifted from trucks to other means of transport, and of demand for the Group s commercial vehicles falling as a result. At the same time, wherever the economic and regulatory situation permits, there are opportunities above and beyond current projections. These arise from faster growth in the emerging markets where vehicle densities are currently still low. The demand that built up in individual established markets during the crisis could also bring a more marked recovery in these markets if the economic environment eases more quickly than expected. Price pressure in established automotive markets due to high market saturation is a particular challenge for the Volkswagen Group as a supplier of volume and premium models. Competitive pressures are likely to remain high in the future. Individual manufacturers may respond by offering incentives in order to meet their sales targets, putting the entire sector under additional pressure, particularly in Western Europe, the USA and China. Western Europe is one of our main sales markets. A drop in prices due to the economic climate triggered by falling demand in this region would have a particularly strong impact on the Company s earnings. We counter this risk with a clear, customer-oriented and innovative product and pricing policy. Outside Western Europe, delivery volumes are spread widely around the world, with the Chinese market accounting for a large share. In numerous existing and developing markets, we either already have a strong presence or are working hard to build one. Moreover, strategic partnerships are helping us to increase our presence in these countries and regions and cater to requirements there. Economic performance varied from region to region in fiscal year The resulting challenges for our trading and sales companies, such as efficient inventory management and a profitable dealer network, are considerable and are being met by appropriate measures on their part. However, financing business activities through bank loans remains difficult. Our financial services companies offer dealers financing on attractive terms with the aim of strengthening their business models and reducing operational risk. We have

173 Group Management Report Report on Risks and Opportunities 169 installed a comprehensive liquidity risk management system so that we can promptly counteract any liquidity bottlenecks at the dealers end that could hinder smooth business operations. We continue to approve loans for vehicle finance on the basis of the same cautious principles applied in the past, taking into account the regulatory requirements of section 25a(1) of the Kreditwesengesetz (KWG German Banking Act). Volkswagen may be exposed to increased competition in aftermarkets for two reasons in particular: firstly, because of the provisions of the block exemption regulations, which have applied to after-sales services since June 2010, and, secondly, because of the amendments included in EU Regulation 566/2011 of June 8, 2011 regarding access by independent market participants to technical information. In addition, the European Commission is currently evaluating the market with regard to existing design protection. If the proposed abolition of design protection for visible replacement parts were to be approved, this could adversely affect the Volkswagen Group s genuine parts business. The automotive industry faces a process of transformation with far-reaching changes. Electric drives, connected vehicles and autonomous driving are associated with both opportunities and risks for our sales. In particular, more rapidly evolving customer requirements, swift implementation of legislative initiatives and the market entry of new competitors from outside the industry will require changed products, a faster pace of innovation and adjustments to business models. Below, we outline the greatest potential for growth and market opportunities for the Volkswagen Group. China China, the largest market in the Asia-Pacific region, continued to grow in the reporting period. The Chinese demand for vehicles will continue to rise in the coming years due to the need for individual mobility, albeit at a slower pace than in the past. Demand will also shift from the large coastal cities to the interior of the country. In order to leverage the considerable opportunities offered by the Chinese market also with regard to e-mobility and to defend our strong market position in China over the long term, we are continuously expanding our product range to include models that have been specially developed for this market. We are further extending our production capacity in this growing market through additional production facilities. India The political and economic situation in India further stabilized in The vehicle markets continued their recovery. We expect this trend to continue. Against this backdrop, the Group is currently consolidating its activities, as India remains an important strategic future market for the Group. USA The volume of the US vehicle market in 2017 fell short of the strong previous year. In 2018, the market volume will probably again be lower than in the reporting period. In the USA, Volkswagen Group of America is systematically pursuing our strategy of becoming a full-fledged volume supplier. An engine plant and the further development of production capacity will allow the Group to better serve the market in the North America region. We are also pressing forward with additional products tailored specifically to the US market. Brazil The economic environment eased in the reporting period and the volume of demand in the vehicle market recovered perceptibly compared with the weak previous year. We anticipate a continued upturn in demand in The growing number of automobile manufacturers with local production has resulted in a sharp increase in price pressure and competition. The Brazilian market plays a key role for the Volkswagen Group. To strengthen our competitive position here, we offer vehicles that have been specially developed for this market and are locally produced, such as the Gol and the Virtus. Russia Russia has the potential to grow into one of the largest automotive markets in the world. Volumes in the Russian vehicle market in 2017 were up on the previous year and we are forecasting a further recovery in However, the heavy reliance on the currently low oil and gas income, a substantial fall in real incomes, high vehicle prices as a result of the weak currency, the political crisis and the related sanctions imposed by the EU and the USA continue to impact the development of demand. The market remains strategically important to the Volkswagen Group, which is why we are working intensively there. The Middle East Despite economic and political instability, the Middle East region offers growth opportunities. We are leveraging the potential for growth with a range of vehicles that has been specifically tailored to this market, but do not have our own production facilities. Power Engineering The underlying trends in the global economy, such as sustained growth and a greater international division of labor,

174 170 Report on Risks and Opportunities Group Management Report are set to continue, as are the resulting increase in global transport routes and volumes, the higher demand for touristic offers such as cruises, and the growing energy needs and the required forces for innovation in relation to global climate policy. We are working systematically to leverage these market opportunities across the world. In the medium term, significant potential can be leveraged by enhancing the aftersales business through the introduction of new products and the expansion of our service network. Going forward, stricter requirements with respect to reliability, the availability of the plants that are already in operation, the increase in environmental compatibility and efficient operation, together with the large number of engines and plants, will provide the basis for growth. As part of the capital goods industry, the Power Engineering Business Area is affected by fluctuations in the investment climate. Even minor changes in growth rates or growth forecasts, resulting from geopolitical uncertainties or volatile commodities and foreign exchange markets, for example, can lead to significant changes in demand or the cancellation of already existing orders. The measures we use to counter the considerable economic risks include flexible production concepts and cost flexibility by means of temporary employment, working time accounts and short-time work, and if necessary structural adjustments. In the Turbomachinery Business Area, for example, as a consequence of weak demand, industry-wide overcapacity and price pressure in 2017, we implemented sweeping structural adjustments at all major production facilities in Europe to make the business area more competitive. Research and development risk The automotive industry is undergoing a radical transformation process. Multinational corporations like Volkswagen are facing major challenges in the areas of customer/market, technological advances and legislation. Key aspects are the implementation of increasingly stringent emission and consumption regulations, taking new test procedures and test cycles (e.g. WLTP) into account, as well as compliance with approval processes (homologation), which are becoming increasingly more complex and time-consuming and may vary by country. The economic success and competitiveness of the Volkswagen Group depend on how successful we are in promptly tailoring our portfolio of products and services to the changing conditions in time. Due to the intensity of the competition and the speed of technological development, identifying relevant trends at an early stage and reacting accordingly is crucial. We therefore conduct trend analyses, customer surveys and scouting activities among other things and examine the relevance of the results for our customers. We counter the risk that it may not be possible to develop modules, vehicles or services within the specified timeframe, to the required quality standards, or in line with cost specifications by continuously and systematically monitoring the progress of all projects and analyzing third-party industrial property rights, increasingly including in relation to communication technologies. We regularly compare this progress with the project s original targets; in the event of variances, we introduce appropriate countermeasures in good time. Our end-to-end project organization supports effective cooperation among all areas involved in the process, ensuring that specific requirements are incorporated into the development process as early as possible and that their implementation is planned in good time. Modular toolkit strategy We are continuously expanding our successful modular toolkits, focusing on future customer requirements, legal requirements and infrastructural requirements. The Modular Transverse Toolkit (MQB) has created an extremely flexible vehicle architecture that permits dimensions determined by the concept such as the wheelbase, track width, wheel size and seat position to be harmonized throughout the Group and utilized flexibly. Other dimensions, for example the distance between the pedals and the middle of the front wheels, are always the same, ensuring a uniform system in the front of the car. Based on the synergies achieved, we are able to cut both development costs and the necessary one-time expenses and manufacturing times. The toolkits also allow us to produce different models from different brands in various quantities, using the same system in a single plant. This means that our capacities can be used with greater flexibility throughout the entire Group, enabling us to achieve efficiency gains. We are currently transferring this principle of standardization with maximum flexibility to the Modular Electrification Toolkit (MEB), a concept developed for all-electric drives. The synergy effects and efficiency gains achieved from the modular toolkit strategy will give us the opportunity to bring e-mobility into mass production manufacturing worldwide from 2020 with the use of the first MEB-based vehicle. Opportunities and risks from partnerships As part of our future program TOGETHER Strategy 2025, we are stepping up our efforts to forge collaborations, both for the transformation of our core business and for the establish-

175 Group Management Report Report on Risks and Opportunities 171 ment of the new mobility solutions business. By entering into partnerships at a local level, we aim to identify regional customer needs more precisely, establish competitive cost structures and develop and offer market-driven products. Going forward, we will concentrate to a greater extent than previously on partnerships, acquisitions and venture capital investments. This will enable us to generate maximum value for the Group and its brands and to expand our expertise, particularly in new areas of business. Volkswagen owns a large number of patents and other industrial property rights and copyrights. Partnerships can lead to patent and licensing infringements and thus to the unauthorized disclosure of company-specific expertise. Volkswagen monitors the sales markets and will also protect its expertise with legal action if necessary. Procurement risks and opportunities Current trends in the automotive industry such as e-mobility and automated driving are resulting in an increased need for financing among suppliers. The Volkswagen Group s procurement risk management system assesses suppliers before they are commissioned to perform projects. Among other things, the procurement function considers the risk of insufficient competition if it concentrates on a few financially strong suppliers when awarding contracts. The procurement risk management system continuously and globally monitors the financial situation of our suppliers and takes targeted measures to avoid supply bottlenecks. The ongoing positive economic trend in Europe, North America and China strengthened our supplier base at an overall good level of capacity utilization and good margin situation. Consistently good financing opportunities and the attractive interest rates provided suppliers with favorable conditions. In the Russian and South American markets, demand grew for the first time in years, providing the possibility of stabilization after several years of consolidation of the supplier base. In spite of this, the number of crises and insolvencies among suppliers worldwide increased in Specialists in restructuring and supply reliability are coordinating the measures to be taken on a Group-wide basis to safeguard production in a timely and sustainable manner. The current trends in the automotive industry will also affect the availability of special raw materials, which are principally used in electrified vehicles. The raw material and demand trend was assessed last year to enable steps to be taken in a timely manner whenever bottlenecks arise. Rising material prices, especially for steel, and shifts in the product mix towards petrol engines present challenges that must be overcome in conjunction with suppliers. Quality problems may necessitate technical intervention involving a considerable financial outlay where costs cannot be passed on to the supplier or can only be passed on to a limited extent. It is not possible at the present time to rule out a potential further increase in recalls of a range of models produced by various manufacturers in which certain airbags manufactured by Takata were installed. This could also affect Volkswagen Group models. In addition to financial difficulties, supply risks may, for example, arise as a result of fires or accidents at suppliers. Supply risks are identified without delay in the procurement function through early warning systems and mitigated immediately by applying appropriate measures. Additional measures were taken to safeguard supply and avert future assembly line stoppages caused by suspensions of deliveries. Monitoring of the antitrust investigations into suppliers by Risk Management on grounds of price-fixing agreements was expanded further in The effects on Volkswagen are being systematically reviewed. Production risk Volatile developments in the global automotive markets, accidents at suppliers, storms and earthquakes caused production volumes of some vehicle models to fluctuate at some plants. In specific markets, we also recorded a change in incoming orders: the number of orders for diesel vehicles fell, while orders for petrol engines rose. We address such fluctuations using tried-and-tested tools, such as flexible working time models. The design of the production network enables us to respond dynamically to varying changes in demand at the sites. Turntable concepts even out capacity utilization between production facilities. At multibrand sites, volatile demand can also be smoothed across brands. Short-term changes in customer demand for specific equipment features in our products, and the decreasing predictability of demand, may lead to supply bottlenecks. We minimize this risk by, among other measures, continuously comparing our available resources against future demand scenarios. If we identify bottlenecks in the supply of materials, we can introduce countermeasures far enough in advance. Production capacity is planned several years in advance for each vehicle project on the basis of expected sales trends. These are subject to market changes and generally entail a

176 172 Report on Risks and Opportunities Group Management Report degree of uncertainty. If forecasts are too optimistic, there is a risk that capacity will not be fully utilized. However, forecasts that are too pessimistic pose a risk of undercapacity, as a result of which it may not be possible to meet customer demand. Particular events beyond our control such as natural disasters or other events such as fires, explosions or the leakage of substances hazardous to health and/or the environment, may adversely affect production to a significant extent. As a consequence, bottlenecks or even outages may occur, thus preventing the planned volume of production from being achieved. We address such risks with, among other things, fire protection measures and hazardous goods management, and, where financially viable, ensure that they are covered by insurance policies. The range of our models is growing, while at the same time product life cycles are becoming shorter; the number of new vehicle start-ups at our sites worldwide is therefore increasing. The processes and technical systems we use for this are complex and there is thus a risk that vehicle deliveries may be delayed. We address this risk by drawing on experience of past start-ups and identifying weaknesses at an early stage so as to ensure that production volumes and quality standards are met during our new vehicle start-ups throughout the Group. In order to prevent downtime in general, lost output, rejects and reworking, we use the TPM (Total Productive Maintenance) method at our production facilities. TPM is a continuous process, that involves the entire workforce. Round-the-clock maintenance of the technical facilities means that they are always operational and guaranteed to function reliably. Risks arising from long-term production In the case of large projects, risks may arise that are often only identified in the course of the project. They may result in particular from contract drafting errors, miscosting, postcontract changes in economic and technical conditions, weaknesses in project management, or poor performance by subcontractors. In particular, omissions or errors made at the start of a project are usually difficult to compensate for or correct, and often entail substantial additional expenses. We endeavor to identify these risks at an even earlier stage and to take appropriate measures to eliminate or minimize them before they occur by constantly optimizing the project control process across all project phases and by using a lessons-learned process and regular project reviews. We can thus further reduce risk, particularly during the bidding and planning phase for large upcoming projects. Risks arising from changes in demand As a result of the diesel issue, the Volkswagen Group may experience decreases in demand, possibly exacerbated by media reports. When dealing with the issue, our highest priority is to provide customers with technical solutions. In addition, we are pressing ahead with the systematic clarification of misconduct in the Company. Consumer demand is shaped not only by real factors such as disposable income, but also by psychological factors that cannot be planned for. Unexpected buyer reluctance, possibly further exacerbated by press reports, could stem from households worries about the future economic situation, for example. This is particularly the case in saturated automotive markets such as Western Europe, where demand could drop as a result of owners holding on to their vehicles for longer. In the reporting period, it became evident that the effects of the eurozone debt crisis have not yet been overcome. Some automotive markets, particularly in Southern Europe, were able to further recover from their historical lows, however, and exhibited positive growth rates. We are countering the buyer reluctance with our attractive range of models and systematic customer orientation. A combination of buyer reluctance as a result of the crisis and increases in some vehicle taxes based on CO 2 emissions as already exist in some European countries is driving a shift in demand towards smaller segments and engines in individual markets. We counter the risk that such a shift will negatively impact the Volkswagen Group s earnings by constantly developing new, fuel-efficient vehicles and alternative drive technologies, based on our drivetrain and fuel strategy. Automotive markets around the world are exposed to risks from government intervention such as tax increases, which curb private consumption, or from protectionist tendencies. Commercial vehicles are capital goods: even minor changes in growth rates or growth forecasts can significantly affect transport requirements and thus demand. The production fluctuations arising as a result require a high degree of flexibility from manufacturers. Although production volumes are significantly lower, the complexity of the trucks and buses range in fact significantly exceeds the already very high complexity of the passenger cars range. Key factors for commercial vehicle customers are total cost of ownership, vehicle reliability and the service provided. In addition, customers are increasingly interested in additional services such as freight optimization and fleet utilization, which we offer in the commercial vehicle segment through the newly established digital brand RIO, for example.

177 Group Management Report Report on Risks and Opportunities 173 MAN Power Engineering s two-stroke engines are produced exclusively by licensees, particularly in South Korea, China and Japan. On account of volatile demand in new ship construction, there is excess capacity in the market for marine engines, which may result in a decline in license revenues and bad debt losses. Due to changes in the competitive environment, especially in China, there is also the risk of losing market share. We address these risks by constantly monitoring the markets, working closely with all licensees and introducing new technologies. Dependence on fleet customer business The fleet customer business is generally more stable than the business with retail customers; in 2017, it continued to be characterized by increasing concentration and internationalization. The Volkswagen Group is well positioned with its broad portfolio of products and drive systems, as well as its targetgroup-focused customer care. There is no concentration of default risks at individual fleet customers or markets. The fact that the market share in Europe remained constant shows that fleet customers still have confidence in the Group. Quality risk Right from the product development stage, we aim to identify and rectify quality problems at the earliest possible point, so as to avoid delays to the start of production. As we are using an increasing number of modular components as part of our modular toolkit strategy, it is particularly important when malfunctions do occur to identify the cause and eliminate the malfunctions as quickly as possible. We further optimized the processes with which we can prevent these defects at our brands and improved our organizational processes during the reporting period so that we are able to counter the associated risks more effectively. Increasing technical complexity and the use of the toolkit system in the Group mean that the need for high-grade supplier components of impeccable quality is rising. To ensure the continuity of production, it is also extremely important that our own plants and our suppliers deliver components on time. We ensure long-term quality and supply capability from the very start of the supply chain using a risk management system that we first tested internally and then introduced among suppliers. In this way, Group Quality Management contributes to fulfilling customer expectations and consequently to boosting our Company s reputation, sales figures and earnings. Assuring quality is of fundamental importance especially in the Brazilian, Russian, Indian and Chinese markets, for which we develop dedicated vehicles and where local manufacturers and suppliers have been established, particularly as it may be very difficult to predict the impact of regulations or official measures. We continuously analyze the conditions specific to each market and adapt quality requirements to them. We counter the local risks we identify by continuously developing measures and implementing them locally, thereby effectively preventing quality defects from arising. Vehicle registration and operation criteria are defined and monitored by national and, in some cases, international authorities. Some countries also have special and in some cases new rules aimed at protecting customers in their dealings with vehicle manufacturers. With our established and revised quality assurance processes, we ensure that the Volkswagen Group brands and their products fulfill all applicable requirements and that local authorities receive timely notification of all issues requiring reporting. By doing so, we reduce the risk of customer complaints or other negative consequences. Personnel risk We counter economic risks as well as changes in the market and competitive situation with a range of instruments that help the Volkswagen Group to remain flexible, even with a fluctuating order situation whether orders decline or demand for our products increases. These include time accounts which are filled when overtime is necessary and reduced through time off in quiet periods, enabling our factories to adjust their capacity to the production volume with measures such as extra shifts, closure days and flexible shift models. The use of temporary workers also allows us to plan more flexibly. All of these measures help the Volkswagen Group to generally maintain a stable permanent workforce even when orders fluctuate. The technical expertise and individual commitment of employees are indispensable prerequisites for the success of the Volkswagen Group. Our end-to-end human resources development strategy gives all employees attractive training and development opportunities, with particular emphasis being placed on strengthening professional skills in the Company s different vocational groups. By boosting our training programs, particularly at our international locations, we are able to adequately address the challenges of technological change. We are continuously expanding our recruitment tools. Our systematic talent relationship management, for example, enables us to make contact with talented candidates from strategically relevant target groups at an early stage and to build a long-term relationship between them and the Group.

178 174 Report on Risks and Opportunities Group Management Report In addition to the standard dual vocational training, programs such as our StIP integrated degree and traineeship scheme ensure a pipeline of highly qualified and motivated employees. We counter the risk that knowledge will be lost as a result of employee fluctuation and retirement with intensive, department-specific training. By systematically increasing our attractiveness as an employer, we gain talented people in the future-critical areas of IT, design and social media. We have also established a base of senior experts in the Group. With this instrument, we use the valuable knowledge of our experienced specialists who have retired from Volkswagen. Organizing efficient knowledge hubs for example the academies dedicated to the various vocational groups under the umbrella of the Volkswagen Group Academy is becoming increasingly important, particularly where departing staff are not directly replaced by specialists. Volkswagen is working on knowledge relays to ensure experience is passed on even when the chain of succession is broken. IT Risk At Volkswagen, a global company geared towards further growth, the information technology (IT) used in all divisions Group-wide is assuming an increasingly important role. IT risks exist in relation to the three protection goals of confidentiality, integrity and availability, and comprise in particular unauthorized access to, modification of and extraction of sensitive electronic corporate data as well as limited systems availability as a consequence of downtime and disasters. We address the risk of unauthorized access to, modification of, or extraction of corporate data with IT security technologies (e.g. firewall and intrusion prevention systems) and a multiple-authentication procedure. Additionally, we increase protection by restricting the allocation of access rights to systems and information and by keeping backup copies of critical data resources. We use technical resources that have been tried and tested in the market, adhering to standards applicable throughout the Company. Redundant IT infrastructures protect us against risks that occur in the event of a systems failure or natural or other disaster. One of our focuses is on continuously enhancing our security measures. The current IT security program, for example, is built on structured rights management, optimization of IT infrastructure, application security and the IT security command center. The role of the latter is to detect cyber-attacks at an early stage and thus help to successfully defeat them using the latest tools. The command center is staffed around the clock in three regions (Europe, America, Asia). Volkswagen complements these technical measures with consistent awareness raising and training for all employees. The high standards we set for the quality of our products also apply to the way in which we handle our customers and employees data. In particular, the digital services for mobility services must be secured. Our guiding principles are data security, transparency and informational self-determination. Environmental protection regulations The specific emission limits for all new passenger car and light commercial vehicle fleets for brands and groups in the EU for the period up to 2019 are set out in Regulation (EC) No 443/2009 on CO 2 emissions from passenger cars and Regulation (EU) No 510/2011 on light commercial vehicles of up to 3.5 tonnes, which came into effect in April 2009 and June 2011, respectively. These regulations are important components of the European climate protection policy and therefore form the key regulatory framework for product design and marketing by all vehicle manufacturers selling in the European market. The average CO 2 emissions of manufacturers new European passenger car fleets have not been allowed to exceed 130 g CO 2 /km since Compliance with this requirement was introduced in phases; since 2015 the entire fleet has to meet this limit. Regulation (EU) No 333/2014, which was adopted in 2014, states that the average emissions of European passenger car fleets may be no higher than just 95 g CO 2 /km from 2021 onwards; in 2020, this emissions limit will already apply to 95% of the fleet. The EU s CO 2 regulation for light commercial vehicles requires limits to be met from 2014 onwards, with targets being phased in over the period to Under this regulation, the average CO 2 emissions of new vehicle registrations in Europe may not exceed 175 g CO 2 /km. From 2020 onwards, the limit under Regulation (EU) No 253/2014, which was adopted in 2014, is 147 g CO 2 /km. In the fourth quarter of 2017, the European Commission published a regulatory proposal for the CO 2 regime after A reduction for the European passenger car and light commercial vehicle fleets of 15% from 2025 and 30% from 2030 are the targets currently proposed. The starting point is the fleet value in The bill is expected to be voted on conclusively at the end of Policymakers are already discussing reduction targets for the transport sector for the period to 2050, such as the 60% reduction in greenhouse gas emissions compared to 1990 levels cited in the EU White Paper on transport published in March These long-term targets can only be achieved through a high proportion of electric vehicles. At the same time, regulations governing fleet fuel consumption are also being developed or introduced outside the EU28, for example in Brazil, Canada, China, India, Japan,

179 Group Management Report Report on Risks and Opportunities 175 Mexico, Saudi Arabia, South Korea, Switzerland, Taiwan and the USA. Brazil has introduced a fleet efficiency target as part of a voluntary program for granting a tax advantage. To achieve a 30% tax advantage in this country, vehicle manufacturers are required to achieve, among other things, average fleet efficiency of around 1.82 megajoules/km by The fuel consumption regulations in China, which set an average fleet target of 6.9 liters/100 km for the period (Phase III), were continued into Phase IV for the period , with a target of 5.0 liters/100 km at the end of this period. Preparations for legislation up to 2025 (Phase V) have begun. In addition to this legislation on fleet consumption, China will impose a so called new energy vehicle quota in the future. This means that from 2019 onwards, battery-powered vehicles, plug-in hybrids and fuel cell vehicles will have to account for a certain proportion of a manufacturer s new passenger car fleet. Due to the extension of greenhouse gas legislation in the USA (the law was signed in 2012), uniform fuel consumption and greenhouse gas standards will continue to apply in all federal states in the period from 2017 to The increased regulation of fleet-based CO 2 emissions and fuel consumption makes it necessary to use the latest mobility technologies in all key markets worldwide. At the same time, electrified and purely electric drives will also become increasingly common. The Volkswagen Group closely coordinates technology and product planning with its brands so as to avoid breaches of fleet fuel consumption limits, since these would entail severe financial penalties. Volkswagen continues to regard diesel technology as an important element in the fulfillment of CO 2 emissions targets. EU legislation allows excess emissions and emission shortfalls to be offset between vehicle models within a fleet of new vehicles. Furthermore, the EU permits some flexibility in fulfilling the emissions targets, for example: > Emission pools may be formed > Relief opportunities may be provided for additional innovative technologies contained in the vehicle that apply outside the test cycle (eco-innovations) > Special rules are in place for small-series producers and niche manufacturers > Particularly efficient vehicles qualify for super-credits Whether the Group meets its fleet targets depends crucially on its technological and financial capabilities, which are reflected in, among other things, our drivetrain and fuel strategy (see page 137). In the EU, a new, more time-consuming test procedure the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP) for determining pollutant and CO 2 emissions as well as fuel consumption in passenger cars and light commercial vehicles has applied to new vehicle types since September 2017 and will apply to all new vehicles from September The Real Driving Emissions (RDE) regulation for passenger cars and light commercial vehicles is also one of the main European regulations. The fourth package of legislation is currently being elaborated. New, uniform limits for nitrogen oxide and particulate emissions in real road traffic have applied to new vehicle types across the EU since September This makes the RDE test procedure fundamentally different from the Euro 6 standard still in force, which stipulates that the limits on the chassis dynamometer are authoritative. The RDE regulation is intended primarily to improve air quality in urban areas and areas close to traffic. It leads to stricter requirements for exhaust gas aftertreatment in passenger cars and light commercial vehicles. The other main EU regulations affecting the automotive industry include: > EU Directive 2007/46/EC establishing a framework for the approval of motor vehicles > EU Directive 2009/33/EC on the promotion of clean and energy-efficient road transport vehicles (Green Procurement Directive) > EU Directive 2006/40/EC relating to emissions from airconditioning systems in motor vehicles > The Car Labeling Directive 1999/94/EC > The Fuel Quality Directive (FQD) 2009/30/EC updating the fuel quality specifications and introducing energy efficiency specifications for fuel production > The Renewable Energy Directive (RED) 2009/28/EC introducing sustainability criteria; the proposal for follow-up regulation (REDII) contains higher quotas for advanced biofuels and is currently being discussed in the competent EU bodies > The revised Energy Taxation Directive 2003/96/EC updating the minimum tax rates for all energy products and power The implementation of the above-mentioned directives by the EU member states serves to support the CO 2 regulations in Europe. These are aimed not only at vehicle manufacturers, but also at other sectors such as the mineral oil industry. Vehicle taxes based on CO 2 emissions are having a similar steering effect; many EU member states have already incorporated CO 2 elements into their rules on vehicle taxation. There is particular momentum in the debate on the introduction of driving bans for diesel vehicles in Germany. This was triggered by the failure of some municipalities and cities to comply with the limits for nitrogen dioxide (NO 2 ) emissions. In many places, lawsuits have been filed arguing that only driving bans for diesel vehicles will bring about the

180 176 Report on Risks and Opportunities Group Management Report necessary short-term reduction in NO 2 emissions. The debates mentioned above have already caused sales of diesel vehicles to decline. Local driving bans are already in place in a number of countries, though these mainly affect older vehicles. One such example are regulations in Belgium that successively bar older vehicles from larger cities. With a view to the future, large urban areas such as Paris and London are discussing banning vehicles with combustion engines. Heavy commercial vehicles first put into operation from 2014 onwards are already subject to the stricter emission requirements of the Euro 6 standard in accordance with Regulation (EU) No 582/2011. Alongside the CO 2 legislation for passenger cars and light commercial vehicles, the EU is preparing more comprehensive regulation of CO 2 emissions in heavy commercial vehicles. Simply setting an overarching limit for these vehicles such as that in place for passenger cars and light commercial vehicles would require an extremely complex set of rules because of the wide range of variants. For this reason, the European Commission has worked with independent scientific institutions and the European Automobile Manufacturers Association (ACEA) to prepare a simulation-based method called the Vehicle Energy Consumption Calculation Tool (VECTO). This can be used to determine the CO 2 emissions of heavy commercial vehicles of over 7.5 tonnes based on their typical use (short-haul, regional, distribution and long-haul trips, service on construction sites and as municipal vehicles, city buses, intercity buses and coaches). A legislative proposal for the CO 2 certification of heavy commercial vehicles and regulations on the reporting and monitoring of CO 2 figures was presented in May 2017; the legislation for the declaration of CO 2 figures for heavy commercial vehicles came into effect in January A CO 2 declaration will be compulsory for selected vehicle categories from 2019 (initially long-haul and regional distribution vehicles, later also buses and other segments), with the captured data first being used to enable the customer to compare information and for certification and monitoring purposes. Further vehicle categories are likely to be included as time progresses. As part of its strategy to decarbonize transport, the European Commission has also announced that it will be presenting a proposal regarding the introduction of CO 2 standards for heavy commercial vehicles by the end of its term of office in The European Commission is currently working on the specific embodiment of such standards and has collected data from manufacturers to define a starting point and mandatory reduction targets for the future. An initial legislative proposal on CO 2 standards for heavy commercial vehicles is expected in May Manufacturers of heavy commercial vehicles are urging the adoption of a system for quantifying CO 2 figures that looks at the vehicle as a whole and not simply at the engine or the tractor, and thus also includes the trailers and bodywork. This transparency should increase competition for more fuelefficient and thus more CO 2 -efficient commercial vehicles and as a result decrease CO 2 emissions. As part of its efforts to reduce the CO 2 emissions of heavy commercial vehicles, the European Commission has also amended the provisions regarding the maximum permissible dimensions and weights of trucks (Directive 1996/53/EC, the Weights and Dimensions Directive) and revised them through EU Directive 2015/719. According to these, cabs with a rounded shape and air conduction devices at the rear of the vehicle will make it possible to improve aerodynamics in future. At the same time, the driver s field of vision is to be extended by increasing the length of the cab in order to improve safety. In addition, the legislators increased the overall weight permitted for vehicles with alternative drive technologies by up to one tonne. The specific technical requirements for the development of aerodynamic and safe cabs are currently being examined. The European commercial vehicles industry supports the goals of reducing CO 2 emissions and improving transport safety. However, it is not just the vehicles themselves that affect future CO 2 emissions; individual components also play an important role, such as reduced rolling resistance tires or the aerodynamic trim of the trailer, as do driving behavior, alternative fuels including the required filling stations, transport infrastructure and transport conditions. As part of a field trial that took place up to the end of 2016, longer and heavier vehicles that can decrease fuel consumption and thus CO 2 emissions by up to 25% according to scientific studies by the Federal Highway Research Institute, were also driving on German roads. Since the beginning of 2017, these longer vehicles have been used in regular operations on a certified road network. Networking and digitalizing the transport system will also eliminate existing inefficiencies such as inadequate utilization of available load capacities, empty trips or unnetworked route planning: vehicles that move in networked, intermodal transport systems in which flows of traffic are optimized through the use of artificial intelligence save fuel and hence reduce CO 2 emissions. Automated driving also presents considerable potential for more sustainable organization of goods transport in road traffic, for example through platooning, in which the driver of the first truck in a convoy of networked, partially self-driving trucks specifies the direction and speed. Driving in the slipstream of other trucks on motorways allows fuel consumption to be reduced considerably. However, platooning requires changes in the legal framework and establishment of the necessary infrastructure. In the Power Engineering segment, the International Maritime Organization (IMO) has introduced the International Convention for the Prevention of Pollution from Ships (MARine POLlution MARPOL), with which limits on emissions from marine engines will be lowered in phases. A reduction of the sulfur content in marine fuel has been

181 Group Management Report Report on Risks and Opportunities 177 confirmed with effect from January 1, In addition, the IMO has decided on a number of emission control areas in Europe and in the USA/Canada that will be subject to special environmental regulations. Expansion to further regions such as the Mediterranean or Japan is already being planned; other regions such as the Black Sea, Alaska, Australia or South Korea are also in discussion. In addition, emission limits also apply, for example, under Regulation (EU) 2016/1628 and in accordance with the regulations of the US Environmental Protection Agency (EPA). As regards stationary equipment, there are a number of national rules in place worldwide that limit permitted emissions. On December 18, 2008, the World Bank Group set limits for gas and diesel engines in its Environmental, Health, and Safety Guidelines for Thermal Power Plants, which are required to be applied if individual countries have adopted no national requirements of their own, or ones that are less strict than those of the World Bank Group. These are currently being revised. In addition, the United Nations adopted the Convention on Long-range Transboundary Air Pollution back in 1979, setting limits on total emissions as well as nitrogen oxide for the signatory states (including all EU states, other countries in Eastern Europe, the USA and Canada). Enhancements to the product portfolio in the Power Engineering segment focus on improving the efficiency of the equipment and systems. The allocation method for emissions certificates changed fundamentally when the third emissions trading period ( ) began. As a general rule, all emission allowances for power generators have been sold at auction since For the manufacturing industry and certain power generation installations (e.g. combined heat and power installations), a portion of the certificates are allocated free of charge on the basis of benchmarks applicable throughout the EU. The portion of certificates allocated free of charge will gradually decrease as the trading period progresses: the remaining quantities required will have to be bought at auction. Furthermore, installation operators can partly fulfill their obligation to hold emission allowances using certificates from climate change projects (Joint Implementation and Clean Development Mechanism projects). In certain (sub-)sectors of industry, there is a risk that production will be transferred to countries outside Europe due to the amended provisions governing emissions trading, a phenomenon referred to as carbon leakage. A consistent quantity of certificates will be allocated to these sectors free of charge for the period from 2013 to 2020 on the basis of the pan-eu benchmarks. The automotive industry was included in the new carbon leakage list that came into effect in As a result, individual plants at European locations of the Volkswagen Group will receive additional certificates free of charge by the end of the third trading period. Already back in 2013, the European Commission decided to initially withhold a portion of the certificates to be auctioned and not to release them for auction until a later date during the third trading period (backloading). The certificates will be directed into a market stability reserve, to be established in The reserve will serve to correct any imbalance between the supply of and demand for certificates in emissions trading in the fourth trading period. Furthermore, the European Commission is planning further modifications in emissions trading when the fourth trading period begins (from 2021) that may lead to a tightening of the system and thus to price increases in the certificates. In addition to the EU member states, other countries in which the Volkswagen Group has production sites are also considering introducing an emissions trading system. Seven corresponding pilot projects are running in China, for example, although they have not so far affected the Volkswagen Group. The Chinese government officially implemented a national emissions trading system at the end of Initially, the impact will only be on the energy generation sector; a gradual expansion is being planned. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested become involved in a great number of legal disputes and governmental proceedings in Germany and abroad. In particular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. For the companies involved, these may result in payment or other obligations. Above all, in cases where US customers assert claims for vehicle defects individually or by way of a class action, highly cost-intensive measures may have to be taken and substantial compensation or punitive damages paid. Corresponding risks also result from US patent infringement proceedings. Risks may also emerge in connection with the adherence to regulatory requirements. This particularly applies in the case of regulatory vagueness that may be interpreted differently by Volkswagen and the authorities responsible for the respective regulations. In addition, legal risks can arise from the criminal activities of individual persons, which even the best compliance management system can never completely prevent. Where transparent and economically viable, adequate insurance coverage was taken out for these risks. For the identifiable and measurable risks, provisions considered appropriate were recognized and information about contingent liabilities disclosed. As some risks cannot be assessed or can only be assessed to a limited extent, the possibility of loss

182 178 Report on Risks and Opportunities Group Management Report or damage not being covered by the insured amounts and provisions cannot be ruled out. This particularly applies to legal risk assessment regarding the diesel issue. Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a Notice of Violation that irregularities in relation to nitrogen oxide (NO x ) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. It was alleged that Volkswagen had installed undisclosed engine management software installed in 2009 to 2015 model year 2.0 l diesel engines to circumvent NO x emissions testing regulations in the USA in order to comply with certification requirements. The California Air Resources Board (CARB), a unit of the US environmental authority of California, announced its own enforcement investigation into this matter. In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. The vast majority of these engines were type EA 189 Euro 5 engines. On November 2, 2015, the EPA issued a Notice of Violation alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. CARB also issued a letter announcing its own enforcement investigation into this matter. AUDI AG has confirmed that at least three auxiliary emission control devices were inadequately disclosed in the course of the US approval documentation. Around 113 thousand vehicles from the 2009 to 2016 model years with certain six-cylinder diesel engines were affected in the USA and Canada, where regulations governing NO x emissions limits for vehicles are stricter than those in other parts of the world. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in particular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the implementation of the technical measures with numerous authorities. The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volkswagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ s and the Braunschweig public prosecutor s criminal investigations as well as other investigations and proceedings which were expected. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ. To resolve US criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volkswagen AG. The Statement of Facts is based in part on Jones Day s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown persons as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents. Potential consequences for Volkswagen s results of operations, financial position and net assets could emerge primarily in the following legal areas: 1. Coordination with the authorities on technical measures Based on decisions dated October 15, 2015, the Kraftfahrt- Bundesamt (KBA German Federal Motor Transport Authority) ordered the Volkswagen Passenger Cars, Volkswagen Commercial Vehicles and SEAT brands to recall all the diesel vehicles that had been issued with vehicle type approval by the KBA from among the eleven million vehicles affected with type EA 189 engines. The recall concerns the member states of the European Union (EU28). On December 10, 2015 a similar decision was issued regarding Audi vehicles with the EA 189 engine. The timetable and action plan forming the basis for the recall order corresponded to the proposals presented in advance by Volkswagen. Depending on the technical complexity of the concerned remedial actions, this means that the Volkswagen Group has been recalling the affected vehicles, of which there are around 8.5 million in total in the EU28 countries, to the service workshops since

183 Group Management Report Report on Risks and Opportunities 179 January The remedial actions differ in scope depending on the engine variant. The technical measures cover software and in some cases hardware modifications, depending on the series and model year. The technical measures for all vehicles in the European Union have since been approved without exception. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO 2 emissions figures, engine power, maximum torque and noise emissions. Once the modifications have been made, the vehicles will thus also continue to comply with the legal requirements and the emission standards applicable in each case. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases. In some countries outside the EU among others South Korea, Taiwan and Turkey national type approval is based on prior recognition of the EC/ECE type approval; the technical measures must therefore be approved by the national authorities. With the exception of South Korea and Chile, we were able to conclude this approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals, Volkswagen is in close contact with the authorities. In addition, there is an intensive exchange of information with the authorities in the USA and Canada, where Volkswagen s proposed modifications in relation to the fourcylinder and the six-cylinder diesel engines also have to be approved. Due to NO x limits that are considerably stricter than in the EU and the rest of the world, it is a greater technical challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. A systematic review process for all engine and gear variants has been underway since On June 14, 2017, based on a technical error in the parameterization of the transmission software for a limited number of specific Audi A7/A8 models that AUDI AG itself discovered and reported to the KBA, the KBA issued an order under which a correction proposed by AUDI AG will be submitted. The technical error lies in the fact that, in the cases concerned, by way of exception a specific function that is standard in all other vehicle concepts is not implemented in actual road use. In Europe, this affects around 24,800 units of certain Audi A7/A8 models. The KBA has not categorized this error as an unlawful defeat device. On July 21, 2017, AUDI AG offered a software-based retrofit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles emissions in real driving conditions in inner city areas beyond the legal requirements. This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. The retrofit package comprises voluntary measures and, to a small extent, measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. The voluntary tests have already reached an advanced stage, but have not yet been completed. The measures adopted and mandated by the KBA involved the recall of different diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard, for which the KBA categorized certain emission strategies as an unlawful defeat device. From July 2017 to January 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. Currently, AUDI AG assumes that the total costs of the software-based retrofit program including the amount based on recalls will be manageable and has recognized corresponding balance-sheet risk provisions. Should additional measures become necessary as a result of the investigations by AUDI AG and the consultations with the KBA, AUDI AG will quickly implement these as part of the retrofit program in the interest of customers. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) In addition to the described approval processes with the responsible registration authorities, in some countries criminal investigations/misdemeanor proceedings (for example, by the public prosecutor s office in Braunschweig and Munich, Germany) and/or administrative proceedings (for example, by the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin the German Federal Financial Supervisory Authority) have been opened. The public prosecutor s offices in Braunschweig and Munich are investigating the core issue of the criminal investigations. Whether this will result in fines for the Company, and if so what their amount might be, is currently subject to estimation risks. According to Volkswagen s estimates so far, the likelihood of a sanction in the majority of these proceedings is less than 50%. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%.

184 180 Report on Risks and Opportunities Group Management Report 3. Product-related lawsuits worldwide (excluding the USA/ Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits against Volkswagen AG and other Volkswagen Group companies. In addition, it is possible that importers and dealers could assert claims against Volkswagen AG and other Volkswagen Group companies, e.g. through recourse claims. As well as individual lawsuits, class action lawsuits are possible in various jurisdictions (albeit not in Germany). Furthermore, in a number of markets it is possible that consumer and/or environmental organizations will apply for an injunction or assert claims for a declaratory judgment or for damages. In the context of the diesel issue, various lawsuits are currently pending against Volkswagen AG and other Volkswagen Group companies at present. There are pending class action proceedings and lawsuits brought by consumer and/or environmental associations against Volkswagen AG and other companies of the Volkswagen Group in various countries such as Argentina, Australia, Belgium, Brazil, China, the Czech Republic, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Switzerland, Taiwan and the United Kingdom. The class action proceedings are lawsuits aimed among other things at asserting damages or, as is the case in the Netherlands, at a declaratory judgment that customers are entitled to damages. With the exception of Brazil, where there has already been a non-binding judgment in the first instance, the amount of these damages cannot yet be quantified more precisely due to the early stage of the proceedings. Volkswagen does not estimate the litigants prospect of success to be more than 50% in any of the class action proceedings. In South Korea, various mass proceedings are pending (in some of these individual lawsuits several hundred litigants have been aggregated). These lawsuits have been filed to assert damages and to rescind the purchase contract including repayment of the purchase price. Due to special circumstances in the market and specific characteristics of the South Korean legal system, Volkswagen estimates the litigants prospects of success in the South Korean mass proceedings mentioned above to be inherently higher than in other jurisdictions outside the USA and Canada. On May 12, 2017, one first-instance judgment was delivered in these proceedings in South Korea during the fiscal year, in which the court completely dismissed an action filed to assert criminal damages over pollution. The judgment has since become binding. Contingent liabilities have been disclosed for pending class action and mass proceedings that can be assessed and for which the chance of success was deemed not implausible. Provisions were recognized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in numerous countries. In Germany, there are around 9,500 individual lawsuits. In Italy, Austria and Spain, lawsuits numbering in the low three-digit range and in France and Ireland individual lawsuits in the two-digit range are pending against Volkswagen AG and other companies of the Volkswagen Group, most of which are aimed at asserting damages or rescinding the purchase contract. In addition, on November 29, 2017, Volkswagen AG was served with an action brought by financialright GmbH asserting the rights assigned to it by a total of approximately 15,000 customers in Germany. This action seeks the payment of around 350 million in return for restitution of the vehicles. In Switzerland, a claim for damages was brought against Volkswagen AG in December 2017 from the assigned rights of some 6,000 customers; the stated amount in dispute is approximately 30 million Swiss francs. According to Volkswagen s estimates so far, the litigants prospect of success is below 50% in the vast majority of the individual lawsuits. Contingent liabilities have therefore been disclosed for those lawsuits that can be assessed and for which the chance of success was deemed not implausible. It is too early to estimate how many customers will take advantage of the option to file lawsuits in the future, beyond the existing lawsuits, or what their prospects of success will be. 4. Lawsuits filed by investors worldwide (excluding the USA/ Canada) Investors from Germany and abroad have filed claims for damages against Volkswagen AG in some cases along with Porsche Automobil Holding SE (Porsche SE) as joint and several debtors based on purported losses due to alleged misconduct in capital market communications in connection with the diesel issue. The vast majority of these investor lawsuits are currently pending at the District Court (Landgericht) in Braunschweig. On August 5, 2016, the District Court in Braunschweig ordered that common questions of law and fact relevant to the lawsuits pending at the District Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braunschweig for a binding declaratory decision pursuant to the German Act on Model Case Proceedings in Disputes Regarding Capital Market Information (Kapitalanleger-Musterverfahrensgesetz KapMuG). In this proceeding, common

185 Group Management Report Report on Risks and Opportunities 181 questions of law and fact relevant to these actions shall be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the District Court in Braunschweig will be stayed pending up until resolution of the common issues, unless they can be dismissed for reasons independent of the common issues that are adjudicated in the model case proceedings. The resolution of the common questions of law and fact in the model case proceedings will be binding for all pending cases in the stayed lawsuits. At the District Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtors. On December 6, 2017, the District Court in Stuttgart issued an order for reference to the Higher Regional Court in Stuttgart in relation to procedural issues, particularly for clarification of jurisdiction. On account of the diesel issue, model case proceedings against Porsche SE are also pending before the Higher Regional Court in Stuttgart. Further investor lawsuits have been filed at various courts in Germany as well as in Austria and the Netherlands. In Austria, the Supreme Court ruled on July 7, 2017 that the investor lawsuits against Volkswagen AG do not fall within the jurisdiction of the Austrian courts. Consequently, all but one of the investor lawsuits that were formerly pending in Austria have been dismissed or withdrawn. The last pending lawsuit has been dismissed at first instance. Worldwide (excluding USA and Canada), investor lawsuits, judicial applications for dunning procedures and conciliation proceedings, and claims under the KapMuG are currently pending against Volkswagen in connection with the diesel issue, with the claims totaling approximately 9 billion. Volkswagen remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized for these investor lawsuits. Insofar as the chance of success was estimated at not lower than 10%, contingent liabilities have been disclosed. 5. Proceedings in the USA/Canada Following the publication of the EPA s Notices of Violation, Volkswagen AG and other Volkswagen Group companies have been the subject of intense scrutiny, ongoing investigations (civil and criminal) and civil litigation. Volkswagen AG and other Volkswagen Group companies have received subpoenas and inquiries from state attorneys general and other governmental authorities and are responding to such investigations and inquiries. In addition, Volkswagen AG and other Volkswagen Group companies in the USA/Canada are facing litigation on a num- ber of different fronts relating to the matters described in the EPA s Notices of Violation. A large number of putative class action lawsuits by customers and dealers have been filed in US federal courts and consolidated for pretrial coordination purposes in the federal multidistrict litigation proceeding in the State of California. On January 4, 2016, the DOJ, Civil Division, on behalf of the EPA, initiated a civil complaint against Volkswagen AG, AUDI AG and certain other Volkswagen Group companies. The action sought statutory penalties under the US Clean Air Act, as well as certain injunctive relief, and was consolidated for pretrial coordination purposes in the California multidistrict litigation. On January 12, 2016, CARB announced that it intended to seek civil fines for alleged violations of the California Health & Safety Code and various CARB regulations. In June 2016, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates reached settlement agreements with the DOJ on behalf of the EPA, CARB and the California Attorney General, private plaintiffs represented by a Plaintiffs Steering Committee (PSC) in the multidistrict litigation pending in California, and the U.S. Federal Trade Commission (FTC). These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands in the USA. Volkswagen AG and certain affiliates also entered into a First Partial Consent Decree with the DOJ, EPA, CARB and the California Attorney General, which was lodged with the court on June 28, On October 18, 2016, a fairness hearing on whether final approval should be granted was held, and on October 25, 2016, the court granted final approval of the settlement agreements and the partial consent order. A number of class members have filed appeals to an US appellate court from the order approving the settlements. The settlements include buyback or, for leased vehicles, early lease termination, or a free emissions modification of the vehicles, provided that the EPA and CARB approve the modification. Volkswagen will also make additional cash payments to affected current owners or lessees as well as certain former owners or lessees. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NO x ) emissions. Volkswagen will also invest a total of USD 2.0 billion over ten

186 182 Report on Risks and Opportunities Group Management Report years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. Volkswagen AG and certain affiliates also entered into a separate Partial Consent Decree with CARB and the California Attorney General resolving certain claims under California unfair competition, false advertising, and consumer protection laws related to both the 2.0 l and 3.0 l TDI vehicles, which was lodged with the court on July 7, Under the terms of the agreement, Volkswagen agreed to pay California USD 86 million. The court entered judgment on the Partial Consent Decree on September 1, 2016 and the USD 86 million payment was made on September 28, On December 20, 2016, Volkswagen entered into a Second Partial Consent Decree, subject to court approval, with the DOJ, EPA, CARB and the California Attorney General that resolved claims for injunctive relief under the Clean Air Act and California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to implement a buyback and lease termination program for Generation l TDI vehicles and a free emissions recall and modification program for Generation l TDI vehicles, and to pay USD 225 million into the environmental mitigation trust that has been established pursuant to the First Partial Consent Decree. The Second Partial Consent Decree was lodged with the court on December 20, 2016 and approved on May 17, In addition, on December 20, 2016, Volkswagen entered into an additional, concurrent California Second Partial Consent Decree, subject to court approval, with CARB and the California Attorney General that resolved claims for injunctive relief under California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to provide additional injunctive relief to California, including the implementation of a Green City initiative and the introduction of three new Battery Electric Vehicle (BEV) models in California by 2020, as well as a USD 25 million payment to CARB to support the availability of BEVs in California. On January 11, 2017, Volkswagen entered into a Third Partial Consent Decree with the DOJ and EPA that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Volkswagen agreed to pay USD 1.45 billion (plus any accrued interest) to resolve the civil penalty and injunctive relief claims under the Clean Air Act, as well as the customs claims of the US Customs and Border Protection. Under the Third Partial Consent Decree, the injunctive relief includes monitoring, auditing and compliance obligations. This Consent Decree, which was subject to public comment, was lodged with the court on January 11, 2017 and approved on April 13, Also on January 11, 2017, Volkswagen entered into a settlement agreement with the DOJ to resolve any claims under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and agreed to pay USD 50 million (plus any accrued interest), specifically denying any liability and expressly disputing any claims. On July 21, 2017, the federal court in the multidistrict litigation in California approved the Third California Partial Consent Decree, in which Volkswagen AG and certain affiliates agreed with the California Attorney General and CARB to pay USD million in civil penalties and cost reimbursements. These penalties covered California environmental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, The DOJ also opened a criminal investigation focusing on allegations that various federal law criminal offenses were committed. On January 11, 2017, Volkswagen AG agreed to plead guilty to three federal criminal felony counts, and to pay a USD 2.8 billion criminal penalty. Pursuant to the terms of this agreement, Volkswagen will be on probation for three years and will work with an independent monitor for three years. The independent monitor will assess and oversee the company s compliance with the terms of the resolution. This includes overseeing the implementation of measures to further strengthen compliance, reporting and monitoring systems, and an enhanced ethics program. Volkswagen will also continue to cooperate with the DOJ s ongoing investigation of individual employees or former employees who may be responsible for criminal violations. Moreover, investigations by various US regulatory and government authorities are ongoing, including in areas relating to securities, financing and tax. On January 31, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settlement agreement with private plaintiffs represented by the

187 Group Management Report Report on Risks and Opportunities 183 PSC in the multidistrict litigation pending in California, and a consent order with the FTC. These agreements resolved certain civil claims made in relation to affected diesel vehicles with 3.0 l TDI engines from the Volkswagen, Audi and Porsche brands in the USA. On February 14, 2017, the court preliminarily approved the settlement agreement with private plaintiffs. On May 11, 2017, the court held a fairness hearing on whether approval should be granted and on May 17, 2017, the court granted final approval of the settlement agreement and the partial stipulated consent order. Under the settlements, consumers options and compensation will depend on whether their vehicles are classified as Generation 1 or Generation 2. Generation 1 (model years ) consumers will have the option of a buyback, early lease termination, trade-in, or a free emissions modification, provided that EPA and CARB approve the modification. Additionally, Generation 1 owners and lessees, as well as certain former owners and lessees, will be eligible to receive cash payments. Generation 2 (model years ) consumers will receive a free emissions-compliant repair to bring the vehicles into compliance with the emissions standards to which they were originally certified, as well as cash payments. Volkswagen has received approval from the EPA and CARB for emissions-compliant repairs within the time limits set out in the settlement agreement. Volkswagen will also make cash payments to certain former Generation 2 owners or lessees. In September 2016, Volkswagen announced that it had finalized an agreement to resolve the claims of Volkswagen branded franchise dealers in the USA relating to TDI vehicles and other matters asserted concerning the value of the franchise. The settlement agreement includes a cash payment of up to USD billion, and additional benefits to resolve alleged past, current, and future claims of losses in franchise value. On January 18, 2017, a fairness hearing on whether final approval should be granted was held, and on January 23, 2017, the court granted final approval of the settlement agreement. Additionally, in the USA, some putative class actions, some individual customers lawsuits and some state or municipal claims have been filed in state courts. Volkswagen reached separate agreements with the attorneys general of 45 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer protection and unfair trade practices claims in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA for a settlement amount of USD 622 million. Five states did not join these settlements and still have consumer claims outstanding: Arizona, New Mexico, Oklahoma, Vermont and West Virginia. Volkswagen has also reached separate agreements with the attorneys general of eleven US states (Connecticut, Delaware, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) to resolve their existing or potential future claims for civil penalties and injunctive relief for alleged violations of environmental laws for a settlement amount of 207 million. The attorneys general of ten other US states (Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, New Mexico, Ohio, Tennessee and Texas) and some municipalities have also filed suits in state and federal courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates, seeking civil penalties and injunctive relief for alleged violations of environmental laws. Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, Ohio, Tennessee and Texas participated in the state settlements described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. The environmental claims of two other states Alabama and Wyoming have been dismissed as preempted by federal law. Alabama has appealed this dismissal. In addition to the lawsuits described above, for which provisions have been recognized, a putative class action has been filed on behalf of purchasers of Volkswagen AG American Depositary Receipts, alleging a drop in price purportedly resulting from the matters described in the EPA s Notices of Violation. A putative class action has also been filed on behalf of purchasers of certain USD-denominated Volkswagen bonds, alleging that these bonds were trading at artificially inflated prices due to Volkswagen s alleged misstatements and that the value of these bonds declined after the EPA issued its Notices of Violation.

188 184 Report on Risks and Opportunities Group Management Report These lawsuits have also been consolidated in the federal multidistrict litigation proceeding in the State of California described above. Volkswagen is of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized. In addition, contingent liabilities have not been disclosed as they currently cannot be measured. In Canada, civil consumer claims and regulatory investigations have been initiated for vehicles with 2.0 l and 3.0 l TDI engines. On December 19, 2016, Volkswagen AG and other Canadian and US Volkswagen Group companies reached a class action settlement in Canada with consumers relating to 2.0 l diesel vehicles. Also on December 19, 2016, Volkswagen Group Canada agreed with the Commissioner of Competition in Canada to a civil resolution regarding its regulatory inquiry into consumer protection issues as to those vehicles. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settlement in Canada involving 3.0 l diesel vehicles. The court preliminarily approved the settlement agreement on January 12, 2018, and the notice and opt out period began on January 17, Final approval hearings are scheduled in Quebec and Ontario for April 3 and 5, 2018, respectively. On January 12, 2018, Volkswagen and the Canadian Commissioner of Competition reached a resolution related to civil consumer protection issues relating to 3.0 l diesel vehicles. Also, criminal enforcement-related investigations by the federal environmental regulator and quasicriminal enforcement-related investigations by a provincial environmental regulator are ongoing in Canada related to 2.0 l and 3.0 l diesel vehicles. On September 15, 2017, a provincial regulator in Canada, the Ontario Ministry of the Environment and Climate Change, charged Volkswagen AG under the province s environmental statute with one count alleging that it caused or permitted the operation of model year Volkswagen and Audi brand 2.0 l diesel vehicles that did not comply with prescribed emission standards. Following initial court appearances on November 15, 2017 and February 7, 2018, the matter was put over to April 4, 2018 pending ongoing evidence disclosure. No trial date has been set. Provisions have been recognized for possible obligations stemming from pending lawsuits in Canada. Moreover, in Canada, two securities class actions by investors in Volkswagen AG American Depositary Receipts and shares are pending against Volkswagen AG in the Quebec and Ontario provincial courts. These actions allege misrep- resentations and omissions in financial reporting issued from stemming from the diesel issue. The proposed class periods are for residents in the provinces who purchased the relevant securities between March 12, 2009 and September 18, 2015, and held all or some of the acquired securities until after the alleged first corrective disclosures. Discovery has not begun. In both actions, motions for certification were filed. In the Quebec matter, the motion was heard on February 5 and 6, 2018 and the court s decision is on reserve. In the Ontario matter, the motion is scheduled for hearing on July 10 and 11, In addition, putative class action and joinder lawsuits by customers, and a certified environmental class action on behalf of residents, remain pending in certain provincial courts in Canada. An assessment of the underlying situation is not possible at this early stage of those proceedings. 6. Additional proceedings With its ruling from November 8, 2017, the Higher Regional Court of Celle ordered, upon the request of three US funds, the appointment of a special auditor for Volkswagen AG. The special auditor should examine whether there was a breach of duties on behalf of the members of the Board of Management and Supervisory Board of Volkswagen AG in connection with the diesel issue starting from June 22, 2006 and if this resulted in damages for Volkswagen AG. The ruling from the Higher Regional Court of Celle is formally legally binding. However, Volkswagen AG lodged a constitutional complaint toward the German Federal Constitutional Court regarding the infringement of its constitutionally guaranteed rights. It is currently unclear when the Federal Constitutional Court will reach a decision on this matter. In addition, the District Court of Hanover has filed a second motion for the appointment of a special auditor for Volkswagen AG, which is also aimed at the examination of transactions in connection with the diesel issue. This proceeding will be suspended until the ruling has been announced by the Federal Constitutional Court. 7. Risk assessment regarding the diesel issue To protect against the currently known legal risks related to the diesel issue, provisions of approximately 2.0 billion exist as of December 31, 2017 on the basis of existing information and current assessments. Beyond this, appropriate provisions have been recognized for defense and legal advice expenses.

189 Group Management Report Report on Risks and Opportunities 185 Insofar as these can be adequately measured at this stage, total contingent liabilities in relation to the diesel issue to the aggregate amount of 4.3 billion (previous year: 3.2 billion), of which lawsuits filed by investors account for 3.4 billion (previous year: 3.1 billion), were disclosed in the notes. The provisions recognized for this matter and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the independent, comprehensive investigations have not yet been completed. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to the diesel issue. This is so as to not compromise the results of the proceedings or the interests of the Company. Additional important legal cases In 2011, ARFB Anlegerschutz UG (haftungsbeschränkt) brought an action against Volkswagen AG and Porsche Automobil Holding SE for claims for damages for allegedly violating disclosure requirements under capital market law in connection with the acquisition of ordinary shares in Volkswagen AG by Porsche in The damages currently being sought based on allegedly assigned rights amounted to approximately 2.26 billion plus interest. In April 2016, the District Court in Hanover had formulated numerous objects of declaratory judgment that the cartel senate of the Higher Regional Court in Celle will decide on in model case proceedings under the KapMuG. In the first hearing on October 12, 2017, the senate indicated that it currently does not see claims against Volkswagen AG as justified, both in view of a lack of substantiated evidence and for legal reasons. Some of the desired objects of declaratory judgment on the litigants side may also be inadmissible, it said. Volkswagen AG sees the statements of the court s senate as confirmation that the claims made against the company have absolutely no basis. At the time (2010/2011), other investors had also asserted claims including claims against Volkswagen AG arising out of the same circumstances in an approximate total amount of 4.6 billion and initiated conciliation proceedings. Volkswagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In 2011, the European Commission conducted searches at European truck manufacturers on suspicion of an unlawful exchange of information during the period and issued a statement of objections to MAN, Scania and the other truck manufacturers concerned in November With its settlement decision in July 2016, the European Commission fined five European truck manufacturers. MAN s fine was waived in full as the company had informed the European Commission about the irregularities as a key witness. In September 2017, the European Commission then fined Scania 0.88 billion. Scania has appealed to the European Court in Luxembourg and will use all means at its disposal to defend itself. Scania had already recognized a provision of 0.4 billion in Furthermore, antitrust lawsuits for damages from customers were received. As is the case in any antitrust proceedings, this may result in further lawsuits for damages. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH (formerly Truck & Bus GmbH), a subsidiary of Volkswagen AG, in June In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. It is not uncommon for noncontrolling interest shareholders to institute such proceedings. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest shareholders of MAN should be increased from to per share; at the same time, the amount of the cash compensation was confirmed. The assessment of liability for put options and compensation rights granted to noncontrolling interest shareholders was adjusted in Both applicants and Volkswagen Truck & Bus GmbH have appealed to the Higher Regional Court in Munich. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms engaged by the parties and by the court-appointed auditor of the agreement. Within the scope of the European Commission's ongoing antitrust investigations regarding German automakers, authorities examined documents in the offices of Volkswagen AG in Wolfsburg and AUDI AG in Ingolstadt as part of an announced review. The Volkswagen Group and the Group

190 186 Report on Risks and Opportunities Group Management Report brands concerned have been cooperating fully and for a long time with the European Commission and have submitted a corresponding application. It is currently unclear whether the European Commission will instigate formal proceedings. In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is cooperating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage. Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with petrol engines. Additionally, fourteen putative class actions have been filed against Audi and certain affiliates alleging that defendants concealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. All of these putative class actions have been transferred to the federal multidistrict litigation proceeding in the State of California, and plaintiffs filed a consolidated class action complaint on October 12, 2017, which Volkswagen AG and certain of its affiliates moved to dismiss on December 11, On January 16, 2018, plaintiffs filed an opposition to the motion to dismiss and the court has set a deadline of February 16, 2018 for defendants to file a reply. A hearing is scheduled for May 11, On December 22, 2017, a mass action on behalf of approximately 75 individual plaintiffs alleging similar claims was filed in a California state court, which was removed to the Northern District of California on January 25, In Canada, two similar putative class actions, including a national class, have been filed in Ontario and Quebec provincial courts against AUDI AG, Volkswagen AG and US and Canadian affiliates regarding alleged CO 2 defeat devices in certain petrol Audi models with automatic transmissions. Both of the Canadian actions are in the pre-certification stage. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. From July through November 2017, plaintiffs filed numerous complaints in various US jurisdictions on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen AG and other Group companies. These complaints assert claims under the US Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act, state unfair competition and consumer protection statutes, and common law unjust enrichment. The complaints allege that since the 1990s, defendants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and suppliers. Moreover, the plaintiffs allege that the defendants agreed to limit the size of AdBlue tanks to ensure that US emissions regulators did not scrutinize the emissions control systems in defendants vehicles, and that such an agreement for Volkswagen was the impetus for the creation of the defeat device. On September 28, 2017, a hearing before the Judicial Panel on Multidistrict Litigation (JPML) was held, and on October 4, 2017 the JPML issued its decision consolidating and transferring these cases to Judge Breyer in the Northern District of California. On December 14, 2017, co-lead counsel were appointed representing the interests of a putative class of indirect purchasers and a putative class of direct purchasers, as well as Plaintiffs Steering Committee. On December 20, 2017, deadlines were set for the filing of initial and responsive pleadings and an initial case status conference scheduled for April 5, 2018, and co-lead counsel were directed to file consolidated class action complaints on behalf of the two putative classes by March 15, Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. From July through October 2017, plaintiffs filed claims in Ontario, Quebec and British Columbia on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen Canada Inc., Audi Canada Inc., and other Group companies. The claims assert causes of action under the Competition Act, common law, and Quebec s civil law and contain similar allegations to the US complaints described in the paragraph above. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. In the tax proceedings between MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities took a different view of the tax implications of the acquisition structure chosen for MAN Latin America in In December 2017, a second instance judgment was rendered in

191 Group Management Report Report on Risks and Opportunities 187 administrative court proceedings, which was negative for MAN Latin America. MAN Latin America will initiate proceedings against this judgment before the regular court in Due to the difference in the penalties plus interest which could potentially apply under Brazilian law, the estimated size of the risk in the event that the tax authorities are able to prevail overall with their view is laden with uncertainty. However, a positive outcome continues to be expected for MAN Latin America. Should the opposite occur, this could result in a risk of about 0.7 billion for the contested period from 2009 onwards, which has been stated within the contingent liabilities in the notes. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases. This is so as to not compromise the results of the proceedings or the interests of the Company. Strategies for hedging financial risks In the course of our business activities, financial risks may arise from changes in interest rates, exchange rates, raw material prices, or share and fund prices. Management of financial and liquidity risks is the responsibility of the central Group Treasury department, which minimizes these risks using nonderivative and derivative financial instruments. The Board of Management is informed of the current risk situation at regular intervals. We hedge interest rate risk where appropriate in combination with currency risk and risks arising from fluctuations in the value of financial instruments by means of interest rate swaps, cross-currency interest rate swaps and other interest rate contracts with generally matching amounts and maturities. This also applies to financing arrangements within the Volkswagen Group. Foreign currency risk is reduced in particular through natural hedging, i.e. by flexibly adapting our production capacity at our locations around the world, establishing new production facilities in the most important currency regions and also procuring a large percentage of components locally. We hedge the residual foreign currency risk using hedging instruments. These include currency forwards, currency options and cross-currency interest rate swaps. We use these transactions to limit the currency risk associated with forecasted cash flows from operating activities, intragroup financing and liquidity positions in currencies other than the respective functional currency, for example as a result of restrictions on capital movements. The currency forwards and currency options can have a term of up to six years. We thus hedge our principal foreign currency risks, mostly against the euro and primarily in Argentine pesos, Australian dollars, Brazilian real, Canadian dollars, Chinese renminbi, Czech koruna, Hong Kong dollars, Hungarian forints, Indian rupees, Japanese yen, Mexican pesos, Norwegian krones, Polish zloty, Russian rubles, Singapore dollars, South African rand, South Korean won, sterling, Swedish kronor, Swiss francs, Taiwan dollars and US dollars. Raw materials purchasing entails risks relating to the availability of raw materials and price trends. Potential risks arising from changes in commodity and energy prices in the market are continuously analyzed so that immediate action can be taken whenever these arise. We limit these risks mainly by entering into forward transactions and swaps. We have used appropriate contracts to hedge some of our requirements for commodities such as aluminum, lead, coal, copper, platinum, palladium and rhodium over a period of up to seven years. Similar transactions have been entered into for the purpose of supplementing and improving allocations of CO 2 emission certificates. Pages 282 to 291 of the notes to the consolidated financial statements explain our hedging policy, the hedging rules and the default and liquidity risks, and quantify the hedging transactions mentioned. Additionally, we disclose information on market risk within the meaning of IFRS 7. Risks arising from financial instruments Channeling excess liquidity into investments and entering into derivatives contracts gives rise to counterparty risk. Partial or complete failure by a counterparty to perform its obligation to pay interest and repay principal, for example, would have a negative impact on the Volkswagen Group s earnings and liquidity. We counter this risk through our counterparty risk management, which we describe in more detail in the section entitled Principles and Goals of Financial Management starting on page 118. In addition to counterparty risk, the financial instruments held for hedging purposes hedge balance sheet risks, which we limit by applying hedge accounting. By diversifying when selecting business partners, we ensure that the impact of a default is limited and the Volkswagen Group remains solvent at all times, even in the event of a default by individual counterparties. Risks arising from trade receivables and from financial services are explained in more detail in the notes to the consolidated financial statements, starting on page 282.

192 188 Report on Risks and Opportunities Group Management Report Liquidity risk We ensure that the Company remains solvent at all times by holding liquidity reserves, through confirmed credit lines and through our money market and capital market programs. We cover the capital requirements of the financial services business mainly by raising funds at matching maturities in the national and international financial markets as well as through customer deposits from the direct banking business. Projects are financed by, among other things, loans provided by supranational or international development banks such as the European Investment Bank (EIB), the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD), or by national development banks such as Kreditanstalt für Wiederaufbau (KfW) and Banco Nacional de Desenvolvimento Econômico e Social (BNDES). Confirmed and unconfirmed lines of credit from banks supplement our broadly diversified refinancing structure. As a result of the diesel issue, the ability to use refinancing instruments may possibly be restricted or precluded for the Volkswagen Group. A downgrade of the Company s rating could adversely affect the terms associated with the Volkswagen Group s borrowings. Information on the ratings of Volkswagen AG, Volkswagen Financial Services AG and Volkswagen Bank GmbH can be found on page 113 of this report. Residual value risk in the financial services business In the financial services business, we agree to buy back selected vehicles at a residual value that is fixed at inception of the contract. Residual values are set at a realistic amount so that we are able to leverage market opportunities. We evaluate the underlying lease and financing contracts at regular intervals and recognize any necessary provisions if we identify any potential risks. Management of the residual value risk is based on a defined feedback loop ensuring the full assessment, monitoring, management and communication of risks. This process design ensures not only professional management of residual risks but also that we systematically improve and enhance our handling of residual value risks. As part of our risk management, we use residual value forecasts to regularly assess the appropriateness of the provisions for risks and the potential for residual value risk also with a view to the diesel issue and the current debate on the possible introduction of driving bans for diesel vehicles in major European cities at a future date. In the process, we compare the contractually agreed residual values with the fair values obtainable. These are determined utilizing data from external service providers and our own marketing data. We do not take account of the upside in residual market values when making provisions for risks. More information on residual value risk and other risks in the financial services business, such as counterparty, market and liquidity risk, can be found in the 2017 Annual Report of Volkswagen Financial Services AG and Volkswagen Bank GmbH.

193 Group Management Report Report on Risks and Opportunities 189 Reputational risks The reputation of the Volkswagen Group and its brands is one of the most important assets and forms the basis for longterm business success. Our policy on issues such as integrity, ethics and sustainability is in the public focus. One of the basic principles of running our business is therefore to pay particular attention to compliance with legal requirements and ethical principles. However, we are aware that misconduct or criminal acts of individuals and the resulting reputational damage can never be fully prevented. In addition, media reactions can have a negative effect on the reputation of the Volkswagen Group and its brands. This impact could be amplified through insufficient crisis communication. Moreover, the above-described individual risks that may arise in the course of our operating activities may turn into a threat to the Volkswagen Group s reputation. OVERALL ASSESSMENT OF THE RISK AND OPPORTUNITY POSITION The Volkswagen Group s overall risk and opportunity position results from the specific risks and opportunities shown above. We have put in place a comprehensive risk management system to ensure that these risks are controlled. The most significant risks to the Group may result from a negative trend in unit sales of, and markets for, vehicles and genuine parts, from the failure to develop and produce products in line with demand and from quality problems. Risks relating to the diesel issue still remain for the Volkswagen Group which, when aggregated, are among the most significant risks. Taking into account all the information known to us at present, no risks exist which could pose a threat to the continued existence of significant Group companies or the Volkswagen Group. Other factors Going beyond the risks already outlined, there are other factors that cannot be predicted and whose repercussions are therefore difficult to control. Should these transpire, they could have an adverse effect on the further development of the Volkswagen Group. In particular, these factors include natural disasters, epidemics and terrorist attacks. This annual report contains forward-looking statements on the business development of the Volkswagen Group. These statements are based on assumptions relating to the development of the economic and legal environment in individual countries and economic regions, and in particular for the automotive industry, which we have made on the basis of the information available to us and which we consider to be realistic at the time of going to press. The estimates given entail a degree of risk, and actual developments may differ from those forecast. Any changes in significant parameters relating to our key sales markets, or any significant shifts in exchange rates relevant to the Volkswagen Group, will have a corresponding effect on the development of our business. In addition, there may be departures from our expected business development if the assessments of the factors influencing sustainable value enhancement, as well as risks and opportunities, presented in this annual report develop in a way other than we are currently expecting, or if additional risks and opportunities or other factors emerge that affect the development of our business.

194 190 Prospects for 2018 Group Management Report Prospects for 2018 The Volkswagen Group s Board of Management expects the global economy to record slightly weaker growth in We believe risks will arise from protectionist tendencies, turbulence in the financial markets and structural deficits in individual countries. In addition, growth prospects will continue to be hurt by geopolitical tensions and conflicts. We therefore expect somewhat weaker momentum than in 2017 in both the advanced economies and the emerging markets. We expect the strongest rates of expansion in Asia s emerging economies. We expect trends in the passenger car markets in the individual regions to be mixed in Overall, growth in global demand for new vehicles will probably be slower than in the reporting period. We anticipate that unit sales volumes in Western Europe will fall slightly short of those seen in the reporting period. In the German passenger car market, we estimate that the market volume will be on a level with the previous year. Passenger car demand is expected to substantially exceed the prior-year figures in markets in Central and Eastern Europe. The volume of demand in the markets for passenger cars and light commercial vehicles (up to 6.35 tonnes) in North America is likely to be slightly lower than in the prior year. We expect demand in the South American markets for passenger cars and light commercial vehicles to grow perceptibly as a whole compared with the previous year. The passenger car markets in the Asia-Pacific region look set to continue their growth trajectory in 2018, albeit at a weaker pace. We expect trends in the markets for light commercial vehicles in the individual regions to be mixed again in Overall, we envisage a slight dip in demand. In the markets for mid-sized and heavy trucks that are relevant for the Volkswagen Group and in the relevant markets for buses, new registrations in 2018 are set to rise slightly above the prior-year level. We believe that automotive financial services will continue to be very important for vehicle sales worldwide in The Volkswagen Group is well prepared for the future challenges in the mobility business and the mixed developments in regional automotive markets. Our unique brand portfolio, our presence in all major world markets, our broad, selectively expanded product range and pioneering technologies and services place us in a good competitive position worldwide. In the course of transforming our core business, we will define the positioning of our Group brands more clearly and optimize the vehicle and drive portfolio with a view to the most attractive and fastest-growing market segments. In addition, we are working to make even more focused use of the advantages of our multibrand group by continuously developing new technologies and our toolkits. We expect that deliveries to customers of the Volkswagen Group in 2018 will moderately exceed the prior-year figure amid continuously challenging market conditions. Challenges will arise particularly from the economic situation, the increasing intensity of competition, exchange rate volatility and the diesel issue. In the EU, there is also a new, more time-consuming test procedure for determining pollutant and CO 2 emissions as well as fuel consumption in passenger cars and light commercial vehicles known as the Worldwide Harmonized Light-Duty Vehicles Test Procedure (WLTP). We expect the sales revenues of the Volkswagen Group and its business areas to grow by as much as 5% year-on-year. In terms of the operating profit for the Group and the Passenger Cars Business Area, we forecast an operating return on sales in the range of % in For the Commercial Vehicles Business Area, we anticipate an operating return on sales of between %. In the Power Engineering Business Area, we expect a lower operating loss than in the previous year. For the Financial Services Division, we are forecasting an operating profit at the prior-year level. Wolfsburg, February 23, 2018 The Board of Management

195 4 Consolidated Financial Statements FINANCIAL STATEMENTS

196

197 CONSOLIDATED FINANCIAL STATEMENTS 195 Income Statement 196 Statement of Comprehensive Income 198 Balance Sheet 200 Statement of Changes in Equity 202 Cash Flow Statement 203 NOTES 203 Basis of presentation 204 Effects of new and amended IFRSs 205 New and amended IFRSs not applied 207 Key events 208 Basis of consolidation 218 Consolidation methods 219 Currency translation 220 Accounting policies 230 Segment reporting 233 Income statement disclosures Sales revenue Cost of sales Distribution expenses Administrative expenses Other operating income Other operating expenses Share of the result of equity-accounted investments Interest result Other financial result Income tax income/expense Earnings per share 241 Disclosures in accordance with IAS 23 Borrowing Costs 241 Disclosures in accordance with IFRS 7 Financial Instruments (income statement) 243 Balance sheet disclosures Intangible assets Property, plant and equipment Lease assets and investment property Equity-accounted investments and other equity investments Noncurrent and current financial services receivables Noncurrent and current other financial assets Noncurrent and current other receivables Tax assets Inventories Trade receivables Marketable securities Cash, cash equivalents and time deposits Equity Noncurrent and current financial liabilities Noncurrent and current other financial liabilities Noncurrent and current other liabilities Tax liabilities Provisions for pensions and other post-employment benefits Noncurrent and current other provisions Put options and compensation rights granted to noncontrolling interest shareholders Trade payables 270 Disclosures in accordance with IFRS 7 Financial Instruments (balance sheet) 281 Other disclosures Cash flow statement Financial risk management and financial instruments Capital management Contingent liabilities Litigation Other financial obligations Total audit fees of the Group auditor Total expense for the period Average number of employees during the year Events after the balance sheet date Remuneration based on performance shares and phantom shares (share-based payment) Related party disclosures in accordance with IAS German Corporate Governance Code Remuneration of the Board of Management and the Supervisory Board 315 Responsibility Statement 316 Independent Auditor s Report

198

199 Consolidated Financial Statements Income Statement 195 Income Statement of the Volkswagen Group for the period January 1 to December 31, 2017 million Note Sales revenue 1 230, ,267 Cost of sales 2 188, ,270 Gross result 42,542 40,997 Distribution expenses 3 22,710 22,700 Administrative expenses 4 8,254 7,336 Other operating income 5 14,500 13,049 Other operating expenses 6 12,259 16,907 Operating result 13,818 7,103 Share of the result of equity-accounted investments 7 3,482 3,497 Interest income¹ ,285 Interest expenses¹ 8 2,317 2,955 Other financial result¹ 9 2,022 1,638 Financial result Earnings before tax 13,913 7,292 Income tax income/expense 10 2,275 1,912 Current 3,205 3,273 Deferred 930 1,361 Earnings after tax 11,638 5,379 of which attributable to Noncontrolling interests Volkswagen AG hybrid capital investors Volkswagen AG shareholders 11,354 5,144 Basic earnings per ordinary share in Diluted earnings per ordinary share in Basic earnings per preferred share in Diluted earnings per preferred share in The structure within the financial result has been changed. The presentation of finance costs has been replaced with interest income and interest expenses. Prior year figures have been adjusted accordingly. Further disclosures can be found in the Interest result section.

200 196 Statement of Comprehensive Income Consolidated Financial Statements Statement of Comprehensive Income Changes in comprehensive income for the period January 1 to December 31, 2016 million Total Equity attributable to Volkswagen AG shareholders Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to noncontrolling interests Earnings after tax 5,379 5, Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax 5,249 5,248 1 Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income 1,591 1,591 1 Pension plan remeasurements recognized in other comprehensive income, net of tax 3,658 3,657 0 Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax 1 1 Items that will not be reclassified to profit or loss 3,658 3,658 0 Exchange differences on translating foreign operations Unrealized currency translation gains/losses Transferred to profit or loss 3 3 Exchange differences on translating foreign operations, before tax Deferred taxes relating to exchange differences on translating foreign operations 3 3 Exchange differences on translating foreign operations, net of tax Cash flow hedges Fair value changes recognized in other comprehensive income 3,555 3,555 0 Transferred to profit or loss 1,322 1,322 0 Cash flow hedges, before tax 4,877 4,877 0 Deferred taxes relating to cash flow hedges 1,422 1,422 0 Cash flow hedges, net of tax 3,455 3,455 0 Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets 6 6 Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss 3,209 3,210 1 Other comprehensive income, before tax Deferred taxes relating to other comprehensive income Other comprehensive income, net of tax Total comprehensive income 4,930 4,

201 Consolidated Financial Statements 197 Changes in comprehensive income for the period January 1 to December 31, 2017 million Total Equity attributable to Volkswagen AG shareholders Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to noncontrolling interests Earnings after tax 11,638 11, Pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, before tax Deferred taxes relating to pension plan remeasurements recognized in other comprehensive income Pension plan remeasurements recognized in other comprehensive income, net of tax Share of other comprehensive income of equity-accounted investments that will not be reclassified to profit or loss, net of tax Items that will not be reclassified to profit or loss Exchange differences on translating foreign operations Unrealized currency translation gains/losses 2,095 2,094 1 Transferred to profit or loss 4 4 Exchange differences on translating foreign operations, before tax 2,099 2,098 1 Deferred taxes relating to exchange differences on translating foreign operations 8 8 Exchange differences on translating foreign operations, net of tax 2,107 2,106 1 Cash flow hedges Fair value changes recognized in other comprehensive income 6,137 6,137 0 Transferred to profit or loss Cash flow hedges, before tax 5,579 5,579 0 Deferred taxes relating to cash flow hedges 1,597 1,597 0 Cash flow hedges, net of tax 3,982 3,982 0 Available-for-sale financial assets Fair value changes recognized in other comprehensive income Transferred to profit or loss Available-for-sale financial assets, before tax Deferred taxes relating to available-for-sale financial assets Available-for-sale financial assets, net of tax Share of other comprehensive income of equity-accounted investments that may be reclassified subsequently to profit or loss, net of tax Items that may be reclassified subsequently to profit or loss 1,622 1,622 1 Other comprehensive income, before tax 4,133 4,132 1 Deferred taxes relating to other comprehensive income 1,828 1,828 0 Other comprehensive income, net of tax 2,305 2,304 1 Total comprehensive income 13,943 13,

202 198 Balance Sheet Consolidated Financial Statements Balance Sheet of the Volkswagen Group as of December 31, 2017 million Note Dec. 31, 2017 Dec. 31, 2016 Assets Noncurrent assets Intangible assets 12 63,419 62,599 Property, plant and equipment 13 55,243 54,033 Lease assets 14 39,254 38,439 Investment property Equity-accounted investments 15 8,205 8,616 Other equity investments 15 1, Financial services receivables 16 73,249 68,402 Other financial assets 17 8,455 8,256 Other receivables 18 2,252 2,009 Tax receivables Deferred tax assets 19 9,810 9, , ,010 Current assets Inventories 20 40,415 38,978 Trade receivables 21 13,357 12,187 Financial services receivables 16 53,145 49,673 Other financial assets 17 11,998 11,844 Other receivables 18 5,346 5,130 Tax receivables 19 1,339 1,126 Marketable securities 22 15,939 17,520 Cash, cash equivalents and time deposits 23 18,457 19,265 Assets held for sale , ,722 Total assets 422, ,732

203 Consolidated Financial Statements Balance Sheet 199 million Note Dec. 31, 2017 Dec. 31, 2016 Equity and Liabilities Equity 24 Subscribed capital 1,283 1,283 Capital reserves 14,551 14,551 Retained earnings 81,367 70,446 Other reserves 560 1,158 Equity attributable to Volkswagen AG hybrid capital investors 11,088 7,567 Equity attributable to Volkswagen AG shareholders and hybrid capital investors 108,849 92,689 Noncontrolling interests ,077 92,910 Noncurrent liabilities Financial liabilities 25 81,628 66,358 Other financial liabilities 26 2,665 4,488 Other liabilities 27 6,199 5,664 Deferred tax liabilities 28 5,636 4,745 Provisions for pensions 29 32,730 33,012 Provisions for taxes 28 3,030 3,556 Other provisions 30 20,839 21, , ,306 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders 31 3,795 3,849 Financial liabilities 25 81,844 88,461 Trade payables 32 23,046 22,794 Tax payables Other financial liabilities 26 8,570 9,438 Other liabilities 27 15,961 15,461 Provisions for taxes 28 1,397 1,301 Other provisions 30 25,347 35, , ,515 Total equity and liabilities 422, ,732

204 200 Statement of Changes in Equity Consolidated Financial Statements Statement of Changes in Equity of the Volkswagen Group for the period January 1 to December 31, 2017 OTHER RESERVES million Subscribed capital Capital reserves Retained earnings Currency translation reserve Balance at Jan. 1, ,283 14,551 69, Earnings after tax 5,144 Other comprehensive income, net of tax 3, Total comprehensive income 1, Capital increases Dividends payment 68 Capital transactions involving a change in ownership interest Other changes 13 Balance at Dec. 31, ,283 14,551 70,446 1,117 Balance at Jan. 1, ,283 14,551 70,446 1,117 Earnings after tax 11,354 Other comprehensive income, net of tax 586 2,106 Total comprehensive income 11,940 2,106 Capital increases¹ Dividends payment 1,015 Capital transactions involving a change in ownership interest Other changes 4 Balance at Dec. 31, ,283 14,551 81,367 3,223 1 Volkswagen AG recorded an inflow of cash funds amounting to 3,500 million, less a discount of 4 million and transaction costs of 23 million, from the hybrid capital issued in June Additionally, there were noncash effects from the deferral of taxes amounting to 8 million. The hybrid capital is required to be classified as equity instruments granted. Explanatory notes on equity are presented in the note relating to equity.

205 Consolidated Financial Statements Statement of Changes in Equity 201 Cash flow hedge reserve Available-for-sale financial assets Equity-accounted investments Equity attributable to Volkswagen AG hybrid capital investors Equity attributable to Volkswagen AG shareholders and hybrid capital investors Noncontrolling interests Total equity 3, ,560 88, , , ,379 3, , , , ,567 92, , ,567 92, , , ,638 3, , ,305 3, , ,943 3,481 3,481 3, , , , , , ,077

206 202 Cash flow statement Consolidated Financial Statements Cash flow statement of the Volkswagen Group for the period January 1 to December 31, 2017 million Cash and cash equivalents at beginning of period 18,833 20,462 Earnings before tax 13,913 7,292 Income taxes paid 3,664 3,315 Depreciation and amortization of, and impairment losses on, intangible assets, property, plant and equipment, and investment property¹ 10,562 10,100 Amortization of and impairment losses on capitalized development costs¹ 3,734 3,586 Impairment losses on equity investments¹ Depreciation of and impairment losses on lease assets¹ 7,734 7,107 Gain/loss on disposal of noncurrent assets and equity investments Share of the result of equity-accounted investments Other noncash expense/income Change in inventories 4,198 3,637 Change in receivables (excluding financial services) 1,660 2,155 Change in liabilities (excluding financial liabilities) 5,302 5,048 Change in provisions 9,443 5,966 Change in lease assets 11,478 12,074 Change in financial services receivables 11,891 9,490 Cash flows from operating activities 1,185 9,430 Investments in intangible assets (excluding development costs), property, plant and equipment, and investment property 13,052 13,152 Additions to capitalized development costs 5,260 5,750 Acquisition of subsidiaries Acquisition of other equity investments Disposal of subsidiaries Disposal of other equity investments 24 2,190 Proceeds from disposal of intangible assets, property, plant and equipment, and investment property Change in investments in securities 1,376 1,245 Change in loans and time deposits 335 2,638 Cash flows from investing activities 16,508 20,679 Capital contributions 3,473 Dividends paid 1, Capital transactions with noncontrolling interest shareholders 3 Proceeds from issuance of bonds 30,279 14,262 Repayments of bonds 17,877 23,601 Changes in other financial liabilities 3,109 19,455 Lease payments Cash flows from financing activities 17,625 9,712 Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents 796 1,628 Cash and cash equivalents at end of period 18,038 18,833 Cash and cash equivalents at end of period 18,038 18,833 Securities, loans and time deposits 26,291 28,036 Gross liquidity 44,329 46,869 Total third-party borrowings 163, ,819 Net liquidity 119, ,950 1 Net of impairment reversals. Explanatory notes on the cash flow statement are presented in the section relating to the cash flow statement.

207 Consolidated Financial Statements Notes to the Consolidated Financial Statements 203 Notes to the Consolidated Financial Statements of the Volkswagen Group as of December 31, 2017 Basis of presentation Volkswagen AG is domiciled in Wolfsburg, Germany, and entered in the commercial register at the Braunschweig Local Court under No. HRB The fiscal year corresponds to the calendar year. In accordance with Regulation No. 1606/2002 of the European Parliament and of the Council, Volkswagen AG prepared its consolidated financial statements for 2017 in compliance with the International Financial Reporting Standards (IFRSs), as adopted by the European Union. We have complied with all the IFRSs adopted by the EU and required to be applied. The accounting policies applied in the previous year were retained, with the exception of the changes due to the new or amended standards. In addition, we have complied with all the provisions of German commercial law that we are also required to apply, as well as with the German Corporate Governance Code. For information on notices and disclosures of changes regarding the ownership of voting rights in Volkswagen AG in accordance with the Wertpapierhandelsgesetz (WpHG German Securities Trading Act), please refer to the annual financial statements of Volkswagen AG. The consolidated financial statements were prepared in euros. Unless otherwise stated, all amounts are given in millions of euros ( million). All figures shown are rounded, so minor discrepancies may arise from addition of these amounts. The income statement was prepared using the internationally accepted cost of sales method. Preparation of the consolidated financial statements in accordance with the above-mentioned standards requires management to make estimates that affect the reported amounts of certain items in the consolidated balance sheet and in the consolidated income statement, as well as the related disclosure of contingent assets and liabilities. The consolidated financial statements present fairly the net assets, financial position and results of operations as well as the cash flows of the Volkswagen Group. The Board of Management completed preparation of the consolidated financial statements on February 23, On that date, the period ended in which adjusting events after the reporting period are recognized.

208 204 Notes to the Consolidated Financial Statements Consolidated Financial Statements Effects of new and amended IFRSs Volkswagen AG has applied all accounting pronouncements adopted by the EU and effective for periods beginning in fiscal year From January 1, 2017, IAS 7 (Statement of Cash Flows) requires entities to make additional disclosures on changes arising from cash flows and noncash changes in financial liabilities arising from financing activities as reported in the statement of cash flows. Since January 1, 2017, the amendments to IAS 12 (Income Taxes) have clarified the recognition of deferred tax assets for unrealized losses in the case of assets carried at fair value. The IASB amended IFRS 12 (Disclosures of Interests in Other Entities) as part of its 2016 annual improvements project, with effect from January 1, This clarifies that, as a matter of principle, disclosures in accordance with IFRS 12 must also be made for the entity s interests in subsidiaries, joint arrangements, associates and unconsolidated structured entities even if these are classified as held for sale, held for distribution to owners or as discontinued operations. The amendments presented and other amendments do not materially affect the Volkswagen Group s net assets, financial position and results of operations.

209 Consolidated Financial Statements Notes to the Consolidated Financial Statements 205 New and amended IFRSs not applied In its 2017 consolidated financial statements, Volkswagen AG did not apply the following accounting pronouncements that have already been adopted by the IASB, but were not yet required to be applied for the fiscal year. Standard/Interpretation Published by the IASB Application mandatory 1 Adopted by the EU Expected impact IFRS 2 IFRS 4 Classification and Measurement of Share-based Payment Transactions June 20, 2016 Insurance Contracts: Application of IFRS 9 for Insurers September 12, 2016 IFRS 9 Financial Instruments July 24, 2014 IFRS 9 IFRS 10 and IAS 28 IFRS 15 IFRS 15 IFRS 16 Prepayment Features with Negative Compensation Consolidated Financial Statements and Investments in Associates and Joint Ventures: Sales or Contributions of Assets between an Investor and its Associate/Joint Venture October 12, 2017 Revenue from Contracts with Customers May 28, 2014 Clarifications to IFRS 15 Revenue from Contracts with Customers April 12, 2016 January 13, Leases 2016 IFRS 17 Insurance Contracts May 18, 2017 IAS 28 IAS 40 IFRIC 22 IFRIC 23 Investments in Associates: Long-term Interests in Associates and Joint Ventures Transfers of Investment Property January 1, 2018 No None January 1, 2018 Yes None January 1, 2018 Yes January 1, 2019 No None September 11, 2014 Deferred 2 None October 12, 2017 December 8, 2016 Annual Improvements to International Financial Reporting December 8, Standards Annual Improvements to International Financial Reporting December 12, Standards Foreign Currency Transactions and Advance Consideration December 8, 2016 Uncertainty over Income Tax Treatments June 7, 2017 January 1, Yes January 1, 2018 Yes January 1, 2019 Yes Detailed descriptions after the tabular overview Detailed descriptions after the tabular overview Additional transitional expedients, otherwise no material impact Detailed descriptions after the tabular overview January 1, 2021 No No material impact January 1, 2019 No None January 1, 2018 No No material impact January 1, Yes No material impact January 1, 2019 No No material impact January 1, 2018 No Translation of advance payments denominated in foreign currency into the functional currency at the spot rate on the day of payment January 1, 2019 No No material impact 1 Effective date from Volkswagen AG s perspective. 2 The IASB decided on December 15, 2015 to defer the effective date indefinitely. 3 Deferred until January 1, 2018 (IASB decision of September 11, 2015). 4 Minor amendments to a number of IFRSs (IFRS 1 and IAS 28). 5 This relates to the effective date of the amendments to IFRS 1 and IAS Minor amendments to a number of IFRSs (IFRS 3, IFRS 11, IAS 12 and IAS 23).

210 206 Notes to the Consolidated Financial Statements Consolidated Financial Statements IFRS 9 FINANCIAL INSTRUMENTS IFRS 9 changes the accounting requirements for classifying and measuring financial assets, for impairment of financial assets, and for hedge accounting. Financial assets are classified and measured on the basis of the entity s business model and the characteristics of the financial asset s cash flows. A financial asset is initially measured either at amortized cost, at fair value through other comprehensive income, or at fair value through profit or loss. The change in method for classifying and measuring financial assets is expected to have a transition effect of 0.3 billion. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. The classification and measurement of financial liabilities under IFRS 9 are largely unchanged compared with the current accounting requirements of IAS 39. The basis for measuring impairment losses and recognizing loss allowances will switch from an incurred credit loss model to an expected credit loss model. The change in measurement method will lead to a 0.3 billion to 0.5 billion increase in the loss allowance on initial application. These amounts, net of deferred taxes, reduce the retained earnings directly in equity. The increase in the loss allowance results firstly from the requirement to recognize a loss allowance even for financial assets not classified as non-performing and whose credit risk has not increased significantly since initial recognition. Secondly, the increase results from the requirement to recognize loss allowances on the basis of the entire expected remaining life of the contractual asset for financial assets for which there has been a significant increase in credit risk since initial recognition. In the case of hedge accounting, IFRS 9 contains both extended designation options and the need to implement more complex recognition and measurement methods. In addition, IFRS 9 also eliminates the quantitative limits for effectiveness testing. IFRS 9 will have a particularly significant impact on the entity s reclassification practice. Depending on market trends, there is an expectation that operating profit or loss will be affected by hedging transactions to a greater extent. Due to the retrospective application of the guidance on designating option transactions, a transition effect of 0.1 billion is expected. The effect, net of deferred taxes, of the first-time application increases the retained earnings directly in equity. Since the new guidance for hedging with currency forwards will be applied prospectively, these hedges will not result in any initial application effect. This will also result in far more extensive disclosures in the notes. IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS IFRS 15 specifies new accounting rules for revenue recognition. In the MAN subgroup, sales revenue is expected to be recognized at a later point in time than under the current accounting treatment for certain types of contract. Other provisions and other liabilities will be adjusted accordingly. The recognition of prepayments due but not yet transferred by the customer in the form of cash will additionally inflate the balance sheet by an amount in the three-digit million range. In addition, from next year onward, the Volkswagen Group will no longer present the reversal of sales allowances under other operating income, but under sales revenue. The Volkswagen Group will apply the modified retrospective transition method. This is not expected to result in material transition effects for the Volkswagen Group, because the existing approach used by the Volkswagen Group is already largely in line with the new guidance. This will also result in far more extensive disclosures in the notes.

211 Consolidated Financial Statements Notes to the Consolidated Financial Statements 207 IFRS 16 LEASES IFRS 16 changes the accounting treatment for leases. The main objective of IFRS 16 is to recognize all leases. It establishes that lessees are no longer required to classify their leases as either finance leases or operating leases. In the future, they will instead be required to recognize a right-of-use asset and a lease liability for all leases in the statement of financial position. Exceptions will only be made for short-term leases and leases of low-value assets. During the lease term, the right-of-use asset must be depreciated and the lease liability adjusted using an effective interest method and taking the lease payments into account. The new lessee accounting model will therefore tend to increase noncurrent assets and noncurrent liabilities. In the income statement this change is expected to improve the operating result and reduce the financial result. Lessor accounting essentially follows the current guidance of IAS 17. In the future, lessors will continue to classify their leases as finance leases or operating leases on the basis of the risks and rewards incidental to ownership of the leased asset. This will also result in far more extensive disclosures in the notes. Key events On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a Notice of Violation that irregularities in relation to nitrogen oxide (NO x ) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. On November 2, 2015, the EPA issued a Notice of Violation alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. In the months after the International Council on Clean Transportation (ICCT) study was published in May 2014, the test set-ups on which the ICCT study was based were repeated in-house at Volkswagen AG and confirmed the unusually high NO x emissions from certain type EA l diesel engines in the USA. The California Air Resources Board (CARB) a part of the environmental authority of California was informed of this result, and, at the same time, an offer was made to recalibrate the type EA 189 diesel engines in the USA as part of a service measure that was already planned in the USA. This measure was evaluated and adopted by the Ausschuss für Produktsicherheit (APS Product Safety Committee), which initiates necessary and appropriate measures to ensure the safety and conformity of Volkswagen AG s products that are placed in the market. There are no findings that an unlawful defeat device under US law was disclosed to the APS as the cause of the discrepancies or to the persons responsible for preparing the 2014 annual and consolidated financial statements. Instead, at the time the 2014 annual and consolidated financial statements were being prepared, the persons responsible for preparing the 2014 annual and consolidated financial statements remained under the impression that the issue could be solved with comparatively little effort as part of a service measure. In the course of the summer of 2015, however, it became successively apparent to individual members of Volkswagen AG s Board of Management that the cause of the discrepancies in the USA was a modification of parts of the software of the engine control unit, which was later identified as an unlawful defeat device as defined by US law. This culminated in the disclosure of a defeat device to EPA and CARB on September 3, According to the assessment at that time of the responsible persons dealing with the matter, the scope of the costs expected by the Volkswagen Group (recall costs, retrofitting costs and financial penalties) was not fundamentally dissimilar to that of previous cases involving other vehicle manufacturers, and, therefore, appeared to be controllable overall with a view to the business activities of the Volkswagen Group. This assessment by the Volkswagen Group was based, among other things, on the advice of a law firm engaged in the USA for approval issues, according to which similar cases in the past were resolved amicably with the US authorities. The publication of the Notice of Violation by the EPA on September 18, 2015, which, especially at that time came unexpectedly to the Board of Management, then presented the situation in an entirely different light.

212 208 Notes to the Consolidated Financial Statements Consolidated Financial Statements Extensive inquiries were also conducted at AUDI AG in relation to the potential use of unlawful defeat devices under US law in type V6 3.0 l diesel engines. The investigation conducted by Jones Day for Volkswagen AG also comprehensively covered this issue. The AUDI AG Board of Management members in office back at the relevant time have stated that they had no knowledge of the use of unlawful defeat device software under US law in V6 3.0 l TDI engines until they were informed by the EPA in November Within the Volkswagen Group, Volkswagen AG has development responsibility for the four-cylinder diesel engines such as the type EA 189, and AUDI AG has development responsibility for the six-cylinder diesel engines such as the type V6 3.0 l diesel engines. Nothing from the publications made up to the time this report was prepared or from the ongoing investigations and interviews on the diesel issue has presented the Volkswagen AG Board of Management with any conclusive findings or assessments of fact that would result in a different assessment of the associated risks (e.g. investor lawsuits). Additional expenses of 3.2 billion were recognized in fiscal year This is due to an increase of 2.2 billion in expenses for warranties and of 1.0 billion in expenses for legal risks. The main reason for this rise in provisions is that the buyback/retrofit programs for 2.0 l TDI vehicles in North America, which have to be implemented under the settlement deal, are more complex. Continuous monitoring of the program has shown that the scheme is more comprehensive and technically more challenging than expected; this also entails an extension to the program period. Further information on the litigation in connection with the diesel issue can be found in the Litigation section. Further details can be found in the Diesel Issue section of the management report. Basis of consolidation In addition to Volkswagen AG, the consolidated financial statements comprise all significant German and non-german subsidiaries, including structured entities that are controlled directly or indirectly by Volkswagen AG. This is the case if Volkswagen AG obtains power over the potential subsidiaries directly or indirectly from voting rights or similar rights, is exposed, or has rights to, positive or negative variable returns from its involvement with the subsidiaries, and is able to influence those returns. In the case of the structured entities consolidated in the Volkswagen Group, Volkswagen is able to direct the material relevant activities remaining after the change in the structure even if it is not invested in the structured entity concerned and is thus able to influence the variable returns from its involvement. The structured entities are used primarily to enter into asset-backed securities transactions to refinance the financial services business and to invest surplus liquidity in special securities funds. Consolidation of subsidiaries begins at the first date on which control exists, and ends when such control no longer exists. Subsidiaries whose business is dormant or insignificant, both individually and in the aggregate, for the fair presentation of the net assets, financial position and results of operations as well as the cash flows of the Volkswagen Group are not consolidated. They were carried in the consolidated financial statements at cost net of any impairment losses and reversals of impairment losses required to be recognized. Significant companies where Volkswagen AG is able, directly or indirectly, to significantly influence financial and operating policy decisions (associates), or that are directly or indirectly jointly controlled (joint ventures), are accounted for using the equity method. Joint ventures also include companies in which the Volkswagen Group holds the majority of voting rights, but whose articles of association or partnership agreements stipulate that important decisions may only be resolved unanimously. Insignificant associates and joint ventures are carried at cost net of any impairment losses and reversals of impairment losses required to be recognized.

213 Consolidated Financial Statements Notes to the Consolidated Financial Statements 209 The composition of the Volkswagen Group is shown in the following table: Volkswagen AG and consolidated subsidiaries Germany Abroad Subsidiaries carried at cost Germany Abroad Associates, joint ventures and other equity investments Germany Abroad ,329 1,510 The list of all shareholdings that forms part of the annual financial statements of Volkswagen AG can be downloaded from the electronic companies register at and from The following consolidated German subsidiaries with the legal form of a corporation or partnership meet the criteria set out in section 264(3) or section 264b of the Handelsgesetzbuch (HGB German Commercial Code) due to their inclusion in the consolidated financial statements and have as far as possible exercised the option not to publish annual financial statements: > Audi Berlin GmbH, Berlin > Audi Frankfurt GmbH, Frankfurt am Main > Audi Hamburg GmbH, Hamburg > Audi Hannover GmbH, Hanover > Audi Leipzig GmbH, Leipzig > Audi Stuttgart GmbH, Stuttgart > Autostadt GmbH, Wolfsburg > Bugatti Engineering GmbH, Wolfsburg > Dr. Ing. h.c. F. Porsche AG, Stuttgart > Haberl Beteiligungs-GmbH, Munich > Karosseriewerk Porsche GmbH & Co. KG, Stuttgart > MAHAG GmbH, Munich > MOIA GmbH, Berlin > Porsche Connect GmbH, Stuttgart > Porsche Consulting GmbH, Bietigheim-Bissingen > Porsche Deutschland GmbH, Bietigheim-Bissingen > Porsche Dienstleistungs GmbH, Stuttgart > Porsche Engineering Group GmbH, Weissach > Porsche Engineering Services GmbH, Bietigheim-Bissingen > Porsche Erste Beteiligungsgesellschaft mbh, Stuttgart > Porsche Financial Services GmbH & Co. KG, Bietigheim-Bissingen > Porsche Financial Services GmbH, Bietigheim-Bissingen > Porsche Holding Stuttgart GmbH, Stuttgart > Porsche Leipzig GmbH, Leipzig > Porsche Lizenz- und Handelsgesellschaft mbh & Co. KG, Ludwigsburg > Porsche Logistik GmbH, Stuttgart > Porsche Niederlassung Berlin GmbH, Berlin > Porsche Niederlassung Berlin-Potsdam GmbH, Kleinmachnow > Porsche Niederlassung Hamburg GmbH, Hamburg

214 210 Notes to the Consolidated Financial Statements Consolidated Financial Statements > Porsche Niederlassung Leipzig GmbH, Leipzig > Porsche Niederlassung Stuttgart GmbH, Stuttgart > Porsche Nordamerika Holding GmbH, Ludwigsburg > Porsche Siebte Vermögensverwaltung GmbH, Wolfsburg > Porsche Zentrum Hoppegarten GmbH, Stuttgart > Raffay Versicherungsdienst GmbH, Hamburg > SKODA AUTO Deutschland GmbH, Weiterstadt > VFL Wolfsburg-Fußball GmbH, Wolfsburg > VGRD GmbH, Wolfsburg > Volkswagen AirService GmbH, Braunschweig > Volkswagen Automobile Berlin GmbH, Berlin > Volkswagen Automobile Chemnitz GmbH, Chemnitz > Volkswagen Automobile Frankfurt GmbH, Frankfurt am Main > Volkswagen Automobile Hamburg GmbH, Hamburg > Volkswagen Automobile Hannover GmbH, Hanover > VOLKSWAGEN Automobile Leipzig GmbH, Leipzig > Volkswagen Automobile Region Hannover GmbH, Hanover > Volkswagen Automobile Rhein-Neckar GmbH, Mannheim > Volkswagen Automobile Stuttgart GmbH, Stuttgart > Volkswagen Beteiligungsverwaltung GmbH, Wolfsburg > Volkswagen Dritte Leasingobjekt GmbH, Braunschweig > Volkswagen Erste Leasingobjekt GmbH, Braunschweig > Volkswagen Fünfte Leasingobjekt GmbH, Braunschweig > Volkswagen Gebrauchtfahrzeughandels und Service GmbH, Langenhagen > Volkswagen Group IT Services GmbH, Wolfsburg > Volkswagen Group Real Estate GmbH & Co. KG, Wolfsburg > Volkswagen Group Services GmbH, Wolfsburg > Volkswagen Immobilien GmbH, Wolfsburg > Volkswagen Konzernlogistik GmbH & Co. OHG, Wolfsburg > Volkswagen Original Teile Logistik GmbH & Co. KG, Baunatal > Volkswagen Osnabrück GmbH, Osnabrück > Volkswagen R GmbH, Wolfsburg > Volkswagen Sachsen GmbH, Zwickau > Volkswagen Sechste Leasingobjekt GmbH, Braunschweig > Volkswagen Siebte Leasingobjekt GmbH, Braunschweig > Volkswagen Truck & Bus GmbH, Braunschweig > Volkswagen Vertriebsbetreuungsgesellschaft mbh, Chemnitz > Volkswagen Vierte Leasingobjekt GmbH, Braunschweig > Volkswagen Zubehör GmbH, Dreieich > Volkswagen Zweite Leasingobjekt GmbH, Braunschweig

215 Consolidated Financial Statements Notes to the Consolidated Financial Statements 211 CONSOLIDATED SUBSIDIARIES Part of the PGA Group SAS, Paris, France, was sold by POFIN Financial Services Verwaltungs GmbH, Freilassing, to the Emil Frey Group on June 1, The sale is in connection with the strategic development of Porsche Holding Salzburg s dealer network and the corresponding focus on dealerships exclusively selling Volkswagen Group brand vehicles. The transaction encompasses dealerships in Poland, the Netherlands, Belgium and in some cases also in France. This had a positive effect of 0.8 billion on net liquidity and, taking into account the disposal of the assets and liabilities, resulted in an insignificant income amount for the Volkswagen Group, which is reported in other operating income. Overall, the transaction led to the disposal of assets in the amount of 2.5 billion and liabilities in the amount of 2.1 billion. The assets mainly consist of noncurrent leased assets ( 0.6 billion) and inventories ( 1.0 billion). The liabilities principally comprise noncurrent and current other liabilities ( 0.9 billion) and trade payables ( 0.7 billion). The other changes in the consolidated Group are shown in the following table: Number Germany Abroad Initially consolidated Subsidiaries previously carried at cost Newly acquired subsidiaries 1 1 Newly formed subsidiaries Deconsolidated Mergers 1 6 Liquidations 4 11 Sales/other The initial inclusion of these subsidiaries, either individually or collectively, did not have a significant effect on the presentation of the net assets, financial position and results of operations. The unconsolidated structured entities are immaterial from a Group perspective. In particular, they do not give rise to any significant risks to the Group. INVESTMENTS IN ASSOCIATES From a Group perspective, the associates Sinotruk (Hong Kong) Ltd., Hongkong, China (Sinotruk), Bertrandt AG, Ehningen (Bertrandt), There Holding B.V., Rijswijk, the Netherlands (There Holding), and Navistar International Corporation, Lisle, USA (Navistar), were material at the reporting date. Sinotruk Sinotruk is one of the largest truck manufacturers in the Chinese market. There is an agreement in place between Group companies and Sinotruk regarding a long-term strategic partnership, under which the Group participates in the local market. In addition to the partnership with Sinotruk in the volume segment, exports of MAN vehicles to China are also helping to expand access to the small, but fast-growing premium truck market. Sinotruk s principal place of business is in Hongkong, China. As of December 31, 2017, the quoted market price of the shares in Sinotruk amounted to 648 million (previous year: 466 million).

216 212 Notes to the Consolidated Financial Statements Consolidated Financial Statements Bertrandt Bertrandt is an engineering partner to companies in the automotive and aviation industry. Its portfolio of services ranges from developing individual components through complex modules to end-to-end solutions. Bertrandt s principal place of business is in Ehningen. As of December 31, 2017, the quoted market price of the shares in Bertrandt amounted to 299 million (previous year: 284 million). There Holding The Audi Subgroup, the BMW Group and Daimler AG each hold a 33.3% interest in There Holding B.V., Rijswijk, the Netherlands, which was established in In December 2016, There Holding B.V. signed a contract with Intel Holdings B.V., Schiphol-Rijk, the Netherlands, for the sale of 15% of the shares in HERE International B.V., Rijswijk, the Netherlands. The transaction with Intel Holdings B.V. was completed on January 31, This resulted in a loss of control within the meaning of IFRS 10 at the There Holding B.V. level. The deconsolidation gave rise to a proportionate effect for the Volkswagen Group of 183 million, which is shown in the share of the result of equity-accounted investments. Since a significant influence continues to exist, HERE International B.V. is included in the financial statement of There Holding B.V. as an associate using the equity method. There is no change in the Volkswagen Group s participating interest in There Holding B.V. as a result of the sale. Moreover, in December 2016, an agreement for the sale of 10% of the shares in HERE International B.V. was signed with a consortium consisting of NavInfo Co. Ltd., Beijing, China, Tencent Holdings Ltd., Shenzhen, China, and GIC Private Ltd., Singapore, Singapore. The completion of the transaction with the consortium was dependent on the approval of the relevant authorities. In the third quarter of 2017, a decision was taken not to pursue the transaction any further, because it could no longer be envisaged during the official review process that the necessary approvals would be obtained. In December 2017, agreements for the sale of shares in There Holding B.V. were signed with Robert Bosch Investment Nederland B.V., Boxtel, the Netherlands, and Continental Automotive Holding Netherlands B.V., Maastricht, the Netherlands. In this process, Robert Bosch Investment Nederland B.V. and Continental Automotive Holding Netherlands B.V. are acquiring an interest of 5.9% each in There Holding B.V. Audi, BMW and Daimler are selling their shareholdings in the same amount. The transactions are expected to be completed in the first quarter of 2018, subject to approvals by the authorities. The share attributable to Volkswagen is reported under assets held for sale. The transactions are not expected to have a material effect on the financial position and results of operations. Navistar At the beginning of September 2016, Volkswagen Truck & Bus GmbH, a wholly owned subsidiary of Volkswagen AG, and the US-based commercial vehicle manufacturer Navistar International Corporation, Lisle, USA (Navistar), announced that they had signed an agreement to forge a wide-ranging alliance. The cooperation primarily involves working together on technical components and in procurement. The transaction closed on February 28, Within the framework of a capital increase, Volkswagen Truck & Bus acquired 16.6% of the shares in Navistar, paying USD per share. The purchase price came to 0.3 billion. Due to Volkswagen s representation on the Board of Directors of Navistar and the agreed cooperation, the investment in Navistar is reported as an equity-accounted investment in the consolidated financial statements. The interest held in Navistar was increased to 16.9% by the balance sheet date. As of December 31, 2017, the quoted market price of the shares in Navistar amounted to 595 million.

217 Consolidated Financial Statements Notes to the Consolidated Financial Statements 213 SUMMARIZED FINANCIAL INFORMATION ON MATERIAL ASSOCIATES ON A 100% BASIS: million Sinotruk 1 Bertrandt 2 There Holding Navistar Equity interest (%) Noncurrent assets 2, ,906 1,648 Current assets 5, ,470 Noncurrent liabilities ,893 Current liabilities 4, ,041 Net assets 3, ,195 3,816 Sales revenue 5, ,507 Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received Equity interest (%) Noncurrent assets 2, ,802 Current assets 4, Noncurrent liabilities ,044 Current liabilities 3, Net assets 2, ,832 Sales revenue 4, ,240 Earnings after tax from continuing operations Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income Dividends received Balance sheet amounts refer to the June 30 reporting date and income statement amounts refer to the period from July 1 to June Balance sheet amounts refer to the September 30 reporting date and income statement amounts refer to the period from October 1 to September Due to the first-time inclusion of Navistar and the fact that it has a different fiscal year, the income statement disclosures for the current fiscal year relate to the period from March 1, 2017 to October 31, Balance sheet disclosures relate to the balance sheet date as of October 31.

218 214 Notes to the Consolidated Financial Statements Consolidated Financial Statements RECONCILIATION OF THE FINANCIAL INFORMATION TO THE CARRYING AMOUNT OF THE EQUITY-ACCOUNTED INVESTMENTS: million Sinotruk Bertrandt There Holding Navistar Net assets at January 1 2, ,832 4,270 Profit or loss Other comprehensive income Changes in reserves 1 11 Foreign exchange differences Dividends Net assets at December 31 3, ,195 3,816 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equityaccounted investments Net assets at January 1 3, ,003 Profit or loss Other comprehensive income Changes in reserves 30 Foreign exchange differences 198 Dividends Net assets at December 31 2, ,832 Proportionate equity Consolidation/Goodwill/Others Carrying amount of equityaccounted investments Due to the first-time inclusion of Navistar, the reconciliation of the net carrying amount relates to the period from March 1, 2017 to December 31, SUMMARIZED FINANCIAL INFORMATION ON INDIVIDUALLY IMMATERIAL ASSOCIATES ON THE BASIS OF THE VOLKSWAGEN GROUP S PROPORTIONATE INTEREST: million Earnings after tax from continuing operations 29 2 Earnings after tax from discontinued operations Other comprehensive income 0 1 Total comprehensive income 29 0 Carrying amount of equity-accounted investments Unrecognized losses relating to investments in associates totaled million (previous year: 5 million). There were no contingent liabilities or financial guarantees relating to associates.

219 Consolidated Financial Statements Notes to the Consolidated Financial Statements 215 INTERESTS IN JOINT VENTURES From a Group perspective, the joint ventures FAW-Volkswagen Automotive Company Ltd., Changchun, China, SAIC-Volkswagen Automotive Company Ltd., Shanghai, China, SAIC-Volkswagen Sales Company Ltd., Shanghai, China (SAIC-Volkswagen Sales Company), and Global Mobility Holding B.V., Amsterdam, the Netherlands (Global Mobility Holding), were material at the reporting date or the prior-year reporting date due to their size. FAW-Volkswagen Automotive Company FAW-Volkswagen Automotive Company develops, produces and sells passenger cars. There is an agreement in place between Group companies and the joint venture partner China FAW Corporation Limited regarding a long-term strategic partnership. The principal place of business is in Changchun, China. SAIC-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company develops and produces passenger cars. There is an agreement in place between Group companies and the joint venture partner Shanghai Automotive Industry Corporation regarding a long-term strategic partnership. The principal place of business is in Shanghai, China. SAIC-Volkswagen Sales Company SAIC-Volkswagen Sales Company sells passenger cars for SAIC-Volkswagen Automotive Company. There is an agreement in place between Group companies and the joint venture partner Shanghai Automotive Industry Corporation regarding a long-term strategic partnership. The principal place of business is in Shanghai, China. Global Mobility Holding Through its 50% interest in the joint venture Global Mobility Holding B.V., Amsterdam, the Netherlands (GMH), the Volkswagen Group held a 50% indirect stake in the joint venture s subsidiary, LeasePlan Corporation N.V., Amsterdam, the Netherlands (LeasePlan). GMH s business activity consisted of holding the interest in LeasePlan. LeasePlan is a Dutch financial services group whose core business is leasing and fleet management. On July 23, 2015, GMH sold its 100% interest in LeasePlan to a consortium of international investors. The final approvals for the sale of LeasePlan to the consortium of investors were issued by the competent authorities in January Legal transfer of the LeasePlan shares was completed on March 21, The total value of the transaction was approximately 3.7 billion plus interest in the amount of 31.5 million. In 2016, this had a positive effect of 2.2 billion on investing activities attributable to operating activities and net liquidity and, taking into account the disposal of equity-accounted investment in GMH, resulted in an income amount of 0.2 billion for the Volkswagen Group, which is reported in the financial result. On completion of the transaction, the existing credit line of 1.3 billion provided by the Volkswagen Group was canceled.

220 216 Notes to the Consolidated Financial Statements Consolidated Financial Statements SUMMARIZED FINANCIAL INFORMATION ON THE MATERIAL JOINT VENTURES ON A 100% BASIS: million FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company 1 Global Mobility Holding 2 SAIC-Volkswagen Sales Company 2017 Equity interest (%) Noncurrent assets 10,071 8, Current assets 13,018 9,304 4,383 of which: cash, cash equivalents and time deposits 7,385 6, Noncurrent liabilities 1, of which: financial liabilities Current liabilities 14,768 12,157 4,402 of which: financial liabilities 6 Net assets 6,851 5, Sales revenue 40,828 28,767 33,398 Depreciation and amortization 1,212 1,279 6 Interest income Interest expenses 35 Earnings before tax from continuing operations 4,907 4, Income tax expense 1,369 1, Earnings after tax from continuing operations 3,538 3, Earnings after tax from discontinued operations 10 Other comprehensive income 49 5 Total comprehensive income 3,489 3, Dividends received 1,502 1, Equity interest (%) Noncurrent assets 9,341 7, Current assets 12,962 8,521 3,739 of which: cash, cash equivalents and time deposits 7,073 5, Noncurrent liabilities 1,774 1, of which: financial liabilities Current liabilities 13,063 8,759 3,713 of which: financial liabilities 1 0 Net assets 7,466 5, Sales revenue 40,875 26,064 1,879 30,707 Depreciation and amortization 1,120 1, Interest income Interest expenses 4 70 Earnings before tax from continuing operations 5,546 4, Income tax expense 1,576 1, Earnings after tax from continuing operations 3,970 3, Earnings after tax from discontinued operations Other comprehensive income Total comprehensive income 4,007 3, Dividends received 1,634 1, SAIC-Volkswagen Sales Company sells passenger cars for SAIC-Volkswagen Automotive Company. Therefore, the sales revenue reported for SAIC-Volkswagen Automotive Company was mostly generated from its business with SAIC-Volkswagen Sales Company. 2 GMH transferred the LeasePlan shares to third parties on March 21, 2016 (see further disclosures in this section).

221 Consolidated Financial Statements Notes to the Consolidated Financial Statements 217 RECONCILIATION OF THE FINANCIAL INFORMATION TO THE CARRYING AMOUNT OF THE EQUITY-ACCOUNTED INVESTMENTS: million FAW-Volkswagen Automotive Company SAIC-Volkswagen Automotive Company Global Mobility Holding SAIC-Volkswagen Sales Company 2017 Net assets at January 1 7,466 5, Profit or loss 3,538 3, Other comprehensive income 49 5 Changes in share capital Changes in reserves Foreign exchange differences Dividends 3,755 3, Net assets at December 31 6,851 5, Proportionate equity 2,740 2, Consolidation/Goodwill/Others Carrying amount of equity-accounted investments 2,284 2, Net assets at January 1 7,825 5,618 3, Profit or loss 3,970 3, Other comprehensive income Changes in share capital Changes in reserves Foreign exchange differences Dividends 4,085 3, Net assets at December 31 7,466 5,579 3, Proportionate equity 2,987 2,790 1, Consolidation/Goodwill/Others ,996 Carrying amount of equity-accounted investments 2,647 2, As of March 21, SUMMARIZED FINANCIAL INFORMATION ON INDIVIDUALLY IMMATERIAL JOINT VENTURES ON THE BASIS OF THE VOLKSWAGEN GROUP S PROPORTIONATE INTEREST: million Earnings after tax from continuing operations Earnings after tax from discontinued operations 10 Other comprehensive income 0 3 Total comprehensive income Carrying amount of equity-accounted investments 1,881 1,890 There were no unrecognized losses relating to interests in joint ventures. Contingent liabilities to joint ventures amounted to 186 million (previous year: 183 million) and financial guarantees to joint ventures amounted to 82 million (previous year: million). Cash funds of 260 million (previous year: 173 million) are deposited as collateral for asset-backed securities transactions and are therefore not available to the Volkswagen Group.

222 218 Notes to the Consolidated Financial Statements Consolidated Financial Statements IFRS 5 NON-CURRENT ASSETS HELD FOR SALE As of December 31, 2017, assets in a total amount of 115 million were classified as assets held for sale and reported in a separate line item of the balance sheet in accordance with IFRS 5. The assets held for sale were measured at the lower of carrying amount and fair value, less expected costs to sell. These assets are no longer depreciated. The amount reported is mainly attributable to the planned sale of property, plant and equipment ( 24 million) and the planned sale of shares in There Holding B.V. ( 86 million). The sales will not have any material impact on the Volkswagen Group s results of operations or net liquidity. The sales are expected to be completed in the first half of fiscal year Consolidation methods The assets and liabilities of the German and foreign companies included in the consolidated financial statements are recognized in accordance with the uniform accounting policies used within the Volkswagen Group. In the case of companies accounted for using the equity method, the same accounting policies are applied to determine the proportionate equity, based on the most recent audited annual financial statements of each company. In the case of subsidiaries consolidated for the first time, assets and liabilities are measured at their fair value at the date of acquisition. Their carrying amounts are adjusted in subsequent years. Goodwill arises when the purchase price of the investment exceeds the fair value of identifiable net assets. Goodwill is tested for impairment once a year to determine whether its carrying amount is recoverable. If the carrying amount of goodwill is higher than the recoverable amount, an impairment loss must be recognized. If this is not the case, there is no change in the carrying amount of goodwill compared with the previous year. If the purchase price of the investment is less than the identifiable net assets, the difference is recognized in the income statement in the year of acquisition. Goodwill is accounted for at the subsidiaries in the functional currency of those subsidiaries. Any difference that arises from the acquisition of additional shares of an already consolidated subsidiary is taken directly to equity. Unless otherwise stated, the proportionate equity directly attributable to noncontrolling interests is determined at the acquisition date as the share of the fair value of the assets (excluding goodwill) and liabilities attributable to them. Contingent consideration is measured at fair value at the acquisition date. Subsequent changes in the fair value of contingent consideration do not generally result in the adjustment of the acquisition-date measurement. Acquisition-related costs that are not equity transaction costs are not added to the purchase price, but instead recognized as expenses in the period in which they are incurred. The consolidation process involves adjusting the items in the separate financial statements of the parent and its subsidiaries and presenting them as if they were those of a single economic entity. Intragroup assets, liabilities, equity, income, expenses and cash flows are eliminated in full. Intercompany profits or losses are eliminated in Group inventories and noncurrent assets. Deferred taxes are recognized for consolidation adjustments, and deferred tax assets and liabilities are offset where taxes are levied by the same tax authority and relate to the same tax period.

223 Consolidated Financial Statements Notes to the Consolidated Financial Statements 219 Currency translation Transactions in foreign currencies are translated in the single-entity financial statements of Volkswagen AG and its consolidated subsidiaries at the rates prevailing at the transaction date. Foreign currency monetary items are recorded in the balance sheet using the middle rate at the closing date. Foreign exchange gains and losses are recognized in the income statement. This does not apply to foreign exchange differences from loans receivable that represent part of a net investment in a foreign operation. The financial statements of foreign companies are translated into euros using the functional currency concept, under which asset and liability items are translated at the closing rate. With the exception of income and expenses recognized directly in equity, equity is translated at historical rates. The resulting foreign exchange differences are recognized in other comprehensive income until disposal of the subsidiary concerned, and are presented as a separate item in equity. Income statement items are translated into euros at weighted average rates. The rates applied are presented in the following table: BALANCE SHEET MIDDLE RATE ON DECEMBER 31 INCOME STATEMENT AVERAGE RATE 1 = Argentina ARS Australia AUD Brazil BRL Canada CAD Czech Republic CZK India INR Japan JPY Mexico MXN People s Republic of China CNY Poland PLN Republic of Korea KRW 1, , , , Russia RUB South Africa ZAR Sweden SEK United Kingdom GBP USA USD

224 220 Notes to the Consolidated Financial Statements Consolidated Financial Statements Accounting policies MEASUREMENT PRINCIPLES With certain exceptions such as financial instruments at fair value through profit or loss, available-for-sale financial assets and provisions for pensions and other post-employment benefits, items in the Volkswagen Group are accounted for under the historical cost convention. The methods used to measure the individual items are explained in more detail below. INTANGIBLE ASSETS Purchased intangible assets are recognized at cost and amortized over their useful life using the straight-line method. This relates in particular to software, which is amortized over three years. In accordance with IAS 38, research costs are recognized as expenses when incurred. Development costs for future series products and other internally generated intangible assets are capitalized at cost, provided manufacture of the products is likely to bring the Volkswagen Group an economic benefit. If the criteria for recognition as assets are not met, the expenses are recognized in the income statement in the year in which they are incurred. Capitalized development costs include all direct and indirect costs that are directly attributable to the development process. The costs are amortized using the straight-line method from the start of production over the expected life cycle of the models or powertrains developed generally between two and ten years. Amortization recognized during the year is allocated to the relevant functions in the income statement. Brand names from business combinations usually have an indefinite useful life and are therefore not amortized. An indefinite useful life is usually the result of a brand s further use and maintenance. Goodwill, intangible assets with indefinite useful lives and intangible assets that are not yet available for use are tested for impairment at least once a year. Assets in use and other intangible assets with finite useful lives are tested for impairment only if there are specific indications that they may be impaired. The Volkswagen Group generally applies the higher of value in use and fair value less costs to sell of the relevant cash-generating unit (brands or products) to determine the recoverable amount of goodwill and indefinite-lived intangible assets. Measurement of value in use is based on management s current planning. This planning is based on expectations regarding future global economic trends and on assumptions derived from those trends about the markets for passenger cars and commercial vehicles, market shares and the profitability of the products. The planning for the Financial Services segment is likewise prepared on the basis of these expectations, and also reflects the relevant market penetration rates and regulatory requirements. The planning for the Power Engineering segment reflects expectations about trends in the various individual markets. The planning includes reasonable assumptions about macroeconomic trends (exchange rate, interest rate and commodity price trends) and historical developments. The planning period generally covers five years. For information on the assumptions applied to the detailed planning period, please refer to the Report on Expected Developments, which is part of the Management Report. For subsequent years, plausible assumptions are made regarding future trends. The planning assumptions are adapted to reflect the current state of knowledge. Estimation of cash flows is generally based on the expected growth trends for the markets concerned. The estimates for the cash flows following the end of the planning period are generally based on a growth rate of up to 1% p.a. (previous year: up to 1% p.a.) in the Passenger Cars segment, and on a growth rate of up to 1% p.a. (previous year: up to 1% p.a.) in the Power Engineering and Commercial Vehicles segments.

225 Consolidated Financial Statements Notes to the Consolidated Financial Statements 221 Value in use is determined for the purpose of impairment testing of goodwill, indefinite-lived intangible assets and finite-lived intangible assets mainly capitalized development costs using the following pretax weighted average cost of capital (WACC) rates, which are adjusted if necessary for country-specific discount factors: WACC Passenger Cars segment 5.8% 5.4% Commercial Vehicles segment 6.8% 6.5% Power Engineering segment 8.0% 7.7% The WACC rates are calculated based on the risk-free rate of interest, a market risk premium and the cost of debt. Additionally, specific peer group information on beta factors and leverage are taken into account. The composition of the peer groups used to determine beta factors is continuously reviewed and adjusted if necessary. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is carried at cost less depreciation and where necessary write-downs for impairment. Investment grants are generally deducted from cost. Cost is determined on the basis of the direct and indirect costs that are directly attributable. Special tools are reported under other equipment, operating and office equipment. Property, plant and equipment is depreciated using the straight-line method over its estimated useful life. The useful lives of items of property, plant and equipment are reviewed on a regular basis and adjusted if required. Depreciation is based mainly on the following useful lives: Useful life Buildings Site improvements Technical equipment and machinery Other equipment, operating and office equipment, including special tools 20 to 50 years 10 to 20 years 6 to 12 years 3 to 15 years Impairment losses on property, plant and equipment are recognized in accordance with IAS 36 where the recoverable amount of the asset concerned has fallen below the carrying amount. Recoverable amount is the higher of value in use and fair value less costs to sell. Value in use is determined using the principles described for intangible assets. The discount rates for product-specific tools and investments are the same as the discount rates for capitalized development costs given above for each segment. If the reasons for impairments recognized in previous years no longer apply, the impairment losses are reversed up to a maximum of the amount that would have been determined if no impairment loss had been recognized. In accordance with the principle of substance over form, assets that have been formally transferred to third parties under a sale and leaseback transaction including a repurchase option also continue to be accounted for as separate assets.

226 222 Notes to the Consolidated Financial Statements Consolidated Financial Statements Where leased items of property, plant and equipment are used, the criteria for classification as a finance lease as set out in IAS 17 are met if all material risks and rewards incidental to ownership have been transferred to the Group company concerned. In such cases, the assets concerned are recognized at fair value or at the present value of the minimum lease payments (if lower) and depreciated using the straight-line method over the asset s useful life, or over the term of the lease if this is shorter. The payment obligations arising from the future lease payments are discounted and recorded as a liability in the balance sheet. Where Group companies are the lessees of assets under operating leases, i.e. if not all material risks and rewards are transferred, lease and rental payments are recorded directly as expenses in profit or loss. LEASE ASSETS Vehicles leased out under operating leases are recognized at cost and depreciated to their estimated residual value using the straight-line method over the term of the lease. Impairment losses identified as a result of an impairment test in accordance with IAS 36 are recognized and the future depreciation rate is adjusted. The forecast residual values are adjusted to include constantly updated internal and external information on residual values, depending on specific local factors and the experiences gained in the marketing of used cars. This requires management to make assumptions in particular about vehicle supply and demand in the future, as well as about vehicle price trends. Such assumptions are based either on qualified estimates or on data published by external experts. Qualified estimates are based on external data if available that reflects additional information that is available internally, such as historical experience and current sales data. INVESTMENT PROPERTY Real estate and buildings held in order to obtain rental income (investment property) are carried at amortized cost; the useful lives applied to depreciation generally correspond to those of the property, plant and equipment used by the Company itself. The fair value of investment property must be disclosed in the notes if it is carried at amortized cost. Fair value is generally estimated using an investment method based on internal calculations. This involves determining the income value for a specific building on the basis of gross income, taking into account additional factors such as land value, remaining useful life and a multiplier specific to property. CAPITALIZATION OF BORROWING COSTS Borrowing costs that are directly attributable to the acquisition of qualifying assets on or after January 1, 2009 are capitalized as part of the cost of these assets. A qualifying asset is an asset that necessarily takes at least a year to get ready for its intended use or sale. EQUITY-ACCOUNTED INVESTMENTS The cost of equity-accounted investments is adjusted to reflect the share of increases or reductions in equity at the associates and joint ventures after the acquisition that is attributable to the Volkswagen Group, as well as any effects from purchase price allocation. Additionally, the investment is tested for impairment if there are indications of impairment and written down to the lower recoverable amount if necessary. The recoverable amount is determined using the principles described for indefinite-lived intangible assets. If the reason for impairment ceases to apply at a later date, the impairment loss is reversed to the carrying amount that would have been determined had no impairment loss been recognized.

227 Consolidated Financial Statements Notes to the Consolidated Financial Statements 223 FINANCIAL INSTRUMENTS Financial instruments are contracts that give rise to a financial asset of one company and a financial liability or an equity instrument of another. Regular way purchases or sales of financial instruments are accounted for at the settlement date that is, at the date on which the asset is delivered. IAS 39 classifies financial assets into the following categories: > financial assets at fair value through profit or loss; > held-to-maturity financial assets; > loans and receivables; and > available-for-sale financial assets. Financial liabilities are classified into the following categories: > financial liabilities at fair value through profit or loss; and > financial liabilities measured at amortized cost. We recognize financial instruments at amortized cost or at fair value. The amortized cost of a financial asset or liability is the amount: > at which a financial asset or liability is measured at initial recognition; > minus any principal repayments; > minus any write-down for impairment or uncollectibility; > plus or minus the cumulative amortization of any difference between the original amount and the amount repayable at maturity (premium, discount), amortized using the effective interest method over the term of the financial asset or liability. In the case of current receivables and liabilities, amortized cost generally corresponds to the principal or repayment amount. Fair value generally corresponds to the market or quoted market price. If no active market exists, fair value is determined using other observable inputs as far as possible. If no observable inputs are available, fair value is determined using valuation techniques, such as by discounting the future cash flows at the market interest rate, or by using recognized option pricing models, and, as far as possible, verified by confirmations from the banks that handle the transactions. The fair value option for financial assets and financial liabilities is not used in the Volkswagen Group. Financial assets and financial liabilities are generally presented at their gross amounts and only offset if the Volkswagen Group currently has a legally enforceable right to set off the amounts and intends to settle on a net basis. Subsidiaries, associates and joint ventures that are not consolidated for reasons of materiality do not fall within the scope of IAS 39 and IFRS 7. Other equity investments that are required by IAS 39.46(c) to be measured at cost, net of any impairment losses to be recognized, are presented as measured at fair value. LOANS AND RECEIVABLES, FINANCIAL LIABILITIES AND HELD-TO-MATURITY FINANCIAL ASSETS Loans, receivables and financial liabilities, as well as held-to-maturity financial assets, are measured at amortized cost, unless hedged. Specifically, these relate to: > receivables from financing business; > trade receivables and payables; > other receivables and financial assets and liabilities; > financial liabilities; and > cash, cash equivalents and time deposits.

228 224 Notes to the Consolidated Financial Statements Consolidated Financial Statements AVAILABLE-FOR-SALE FINANCIAL ASSETS Available-for-sale financial assets are either allocated specifically to this category or are financial assets that cannot be assigned to any other category. Available-for-sale financial assets (debt instruments) are carried at fair value. Changes in fair value are recognized directly in equity, net of deferred taxes. Prolonged changes in the fair value of debt instruments (impairment losses, foreign exchange gains and losses, interest calculated using the effective interest method) are recognized in profit or loss. Other equity investments (shares representing an ownership interest of less than 20% as a rule) are also classified as available-for-sale financial assets. They are recognized at cost in the consolidated financial statements if there is no active market for those shares and fair values cannot be reliably ascertained without undue cost or effort. The lower present value of the estimated future cash flows is recognized if there are indications of impairment. There is currently no intention to sell these financial assets. Foreign exchange gains and losses attributable to equity instruments are recognized in other comprehensive income. DERIVATIVES AND HEDGE ACCOUNTING Volkswagen Group companies use derivatives to hedge balance sheet items and future cash flows (hedged items). Appropriate derivatives such as swaps, forward transactions and options are used as hedging instruments. The criteria for the application of hedge accounting are that the hedging relationship between the hedged item and the hedging instrument is clearly documented and that the hedge is highly effective. The accounting treatment of changes in the fair value of hedging instruments depends on the nature of the hedging relationship. In the case of hedges against the risk of change in the carrying amount of balance sheet items (fair value hedges), both the hedging instrument and the hedged risk portion of the hedged item are measured at fair value. Several risk portions of hedged items are grouped into a portfolio if appropriate. In the case of a fair value portfolio hedge, the changes in fair value are accounted for in the same way as for a fair value hedge of an individual underlying. Gains or losses from the remeasurement of hedging instruments and hedged items are recognized in profit or loss. In the case of hedges of future cash flows (cash flow hedges), the hedging instruments are also measured at fair value. Gains or losses from remeasurement of the effective portion of the derivative are initially recognized in the reserve for cash flow hedges directly in equity, and are only recognized in the income statement when the hedged item is recognized in profit or loss; the ineffective portion of a cash flow hedge is recognized immediately in profit or loss. Derivatives used by the Volkswagen Group for financial management purposes to hedge against interest rate, foreign currency, commodity, or price risks, but that do not meet the strict hedge accounting criteria of IAS 39, are classified as financial assets or liabilities at fair value through profit or loss (also referred to below as derivatives not included in hedging relationships). This also applies to options on shares. External hedging instruments of intragroup hedged items that are subsequently eliminated in the consolidated financial statements are also assigned to this category as a general rule. Assets and liabilities measured at fair value through profit or loss consist of derivatives or components of derivatives that are not included in hedge accounting. These relate primarily to the interest component of currency forwards used to hedge sales revenue, commodity futures and currency forwards relating to commodity futures. Gains and losses from the remeasurement and settlement of financial instruments at fair value through profit or loss are reported in the financial result.

229 Consolidated Financial Statements Notes to the Consolidated Financial Statements 225 RECEIVABLES FROM FINANCE LEASES Where a Group company is the lessor generally of vehicles a receivable in the amount of the net investment in the lease is recognized in the case of finance leases, in other words where substantially all the risks and rewards are transferred to the lessee. OTHER RECEIVABLES AND FINANCIAL ASSETS Other receivables and financial assets (except for derivatives) are recognized at amortized cost. IMPAIRMENT LOSSES ON FINANCIAL INSTRUMENTS Default risk on loans and receivables in the financial services business is accounted for by recognizing specific valuation allowances and portfolio-based valuation allowances. More specifically, in the case of significant individual receivables (e.g. dealer finance receivables and fleet customer business receivables) specific valuation allowances are recognized in accordance with Group-wide standards in the amount of the incurred loss. A potential impairment is assumed in the case of a number of situations such as delayed payment over a certain period, the institution of enforcement measures, the threat of insolvency or overindebtedness, application for or the opening of bankruptcy proceedings, or the failure of reorganization measures. Portfolio-based valuation allowances are recognized by grouping together insignificant receivables and significant individual receivables for which there is no indication of impairment into homogeneous portfolios on the basis of comparable credit risk features and allocating them by risk class. As long as no definite information is available as to which receivables are in default, average historical default probabilities for the portfolio concerned are used to calculate the amount of the valuation allowances. As a matter of principle, specific valuation allowances are recognized on receivables outside the Financial Services segment. Valuation allowances on receivables are regularly recognized in separate allowance accounts. An impairment loss is recognized on available-for-sale financial assets if there is objective evidence of permanent impairment. In the case of equity instruments, evidence of impairment is taken to exist, among other things, if the fair value decreases below cost significantly (by more than 20%) or the decrease is prolonged (by more than 10% of the average market prices over one year). If impairment is identified, the cumulative loss is recognized in the reserve and charged to profit and loss. In the case of equity instruments, reversals of impairment losses are taken directly to equity. Impairment losses are recognized on debt instruments if a decrease in the future cash flows of the financial asset is expected. An increase in the risk-free interest rate or an increase in credit risk premiums is not in itself evidence of impairment. DEFERRED TAXES Deferred tax assets are generally recognized for tax-deductible temporary differences between the tax base of assets and liabilities and their carrying amounts in the consolidated balance sheet, as well as on tax loss carryforwards and tax credits provided it is probable that they can be used in future periods. Deferred tax liabilities are generally recognized for all taxable temporary differences between the tax base of assets and liabilities and their carrying amounts in the consolidated balance sheet. Deferred tax liabilities and assets are recognized in the amount of the expected tax liability or tax benefit, as appropriate, in subsequent fiscal years, based on the expected enacted tax rate at the time of realization. The tax consequences of dividend payments are generally not taken into account until the resolution on appropriation of earnings available for distribution has been adopted. Deferred tax assets that are unlikely to be realized within a clearly predictable period are reduced by valuation allowances. Deferred tax assets for tax loss carryforwards are usually measured on the basis of future taxable income over a planning period of five fiscal years. Deferred tax assets and deferred tax liabilities are offset where taxes are levied by the same taxation authority and relate to the same tax period.

230 226 Notes to the Consolidated Financial Statements Consolidated Financial Statements INVENTORIES Raw materials, consumables and supplies, merchandise, work in progress and self-produced finished goods reported in inventories are carried at the lower of cost or net realizable value. Cost is determined on the basis of the direct and indirect costs that are directly attributable. Borrowing costs are not capitalized. The measurement of same or similar inventories is generally based on the weighted average cost method. NONCURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS Under IFRS 5, noncurrent assets or groups of assets and liabilities (disposal groups) are classified as held for sale if their carrying amounts will be recovered principally through a sale transaction rather than through continuing use. Such assets are carried at the lower of their carrying amount and fair value less costs to sell, and are presented separately in current assets and liabilities in the balance sheet. Discontinued operations are components of an entity that have either been disposed of or are classified as held for sale. The assets and liabilities of operations that are held for sale represent disposal groups that must be measured and reported using the same principles as noncurrent assets held for sale. The income and expenses from discontinued operations are presented in the income statement as profit or loss from discontinued operations below the profit or loss from continuing operations. Corresponding disposal gains or losses are contained in the profit or loss from discontinued operations. The prior-year figures in the income statement are adjusted accordingly. PENSION PROVISIONS The actuarial valuation of pension provisions is based on the projected unit credit method stipulated by IAS 19 for defined benefit plans. The valuation is not only based on pension payments and vested entitlements known at the balance sheet date, but also reflects future salary and pension trends, as well as experience-based staff turnover rates. Remeasurements are recognized in retained earnings in other comprehensive income, net of deferred taxes. PROVISIONS FORINCOME TAXES Tax provisions contain obligations resulting from current income taxes. Deferred taxes are presented in separate items of the balance sheet and income statement. Provisions are recognized for potential tax risks on the basis of the best estimate of the liability. SHARE-BASED PAYMENT The share-based payment consists of phantom shares and performance shares. The obligations arising from the share-based payment are accounted for as cash-settled plans in accordance with IFRS 2. The cash-settled sharebased payments are measured at fair value until maturity. Fair value is determined using a recognized valuation technique. The compensation cost is allocated over the vesting period. OTHER PROVISIONS In accordance with IAS 37, provisions are recognized where a present obligation exists to third parties as a result of a past event, where a future outflow of resources is probable and where a reliable estimate of that outflow can be made. Provisions not resulting in an outflow of resources in the year immediately following are recognized at their settlement value discounted to the balance sheet date. Discounting is based on market interest rates. An average discount rate of 0.08% (previous year: 0.04%) was used in the Eurozone. The settlement value also reflects cost increases expected at the balance sheet date. Provisions are not offset against claims for reimbursement. We recognize insurance contracts that form part of the insurance business in accordance with IFRS 4. Reinsurance acceptances are accounted for without any time delay in the year in which they arise. Provisions are generally recognized based on the cedant s contractual duties. Estimation techniques based on assumptions about future changes in claims are used to calculate the claims provision. Other technical provisions relate to the provision for cancellations.

231 Consolidated Financial Statements Notes to the Consolidated Financial Statements 227 The share of the provisions attributable to reinsurers is calculated in accordance with the contractual agreements with the retrocessionaries and reported under other assets. CONTINGENT LIABILITIES If the criteria for recognizing a provision are not met, but the outflow of financial resources is not improbable, such obligations are disclosed in the notes to the consolidated financial statements (see the Contingent liabilities section). Contingent liabilities are only recognized if the obligations are more certain, i.e. the outflow of financial resources has become probable and their amount can be reliably estimated. LIABILITIES Noncurrent liabilities are recorded at amortized cost in the balance sheet. Differences between historical cost and the repayment amount are amortized using the effective interest method. Liabilities to members of partnerships from puttable shares are recognized in the income statement at the present value of the redemption amount at the balance sheet date. Liabilities under finance leases are carried at the present value of the lease payments. Current liabilities are recognized at their repayment or settlement value. REVENUE AND EXPENSE RECOGNITION Sales revenue, interest and commission income from financial services and other operating income are recognized only when the relevant service has been rendered or the goods have been delivered, that is, when the risk has passed to the customer, the amount of sales revenue can be reliably determined and settlement of the amount can be assumed. Revenue is reported net of sales allowances (discounts, rebates, or customer bonuses). Sales revenue from financing and lease agreements is recognized using the effective interest method. If non-interest-bearing or low-interest vehicle financing arrangements are agreed, sales revenue is reduced by the interest benefits granted. Customer financing and finance lease income is determined using the effective interest method and recognized under sales revenue. Sales revenue from extended warranties or maintenance agreements is recognized when deliveries take place or services are rendered. In the case of prepayments, deferred income is recognized proportionately by reference to the costs expected to be incurred, based on experience. Revenue is recognized on a straight-line basis if there is insufficient experience. If the expected costs exceed the accrued sales revenue, a loss is recognized from these agreements. If a contract comprises several separately identifiable components (multiple-element arrangements), these components are recognized separately in accordance with the principles outlined above. Income from assets for which a Group company has a buy-back obligation is recognized only when the assets have definitively left the Group. If a fixed repurchase price was agreed when the contract was entered into, the difference between the selling price and the present value of the repurchase price is recognized as income ratably over the term of the contract. Prior to that time, the assets are carried as inventories in the case of short contract terms and as lease assets in the case of long contract terms. Cost of sales includes the costs incurred to generate the sales revenue and the cost of goods purchased for resale. This item also includes the costs of additions to warranty provisions. Research and development costs not eligible for capitalization in the period and amortization of development costs are likewise carried under cost of sales. Reflecting the presentation of interest and commission income in sales revenue, the interest and commission expenses attributable to the financial services business are presented in cost of sales. Construction contracts are recognized using the percentage of completion (PoC) method, under which revenue and cost of sales are recognized by reference to the stage of completion at the end of the reporting period, based on the contract revenue agreed with the customer and the expected contract costs. As a rule, the stage of completion is determined as the proportion that contract costs incurred by the end of the reporting period bear to the estimated total contract costs (cost-to-cost method). In certain cases, in particular those involving innovative, complex contracts, the stage of completion is measured using contractually agreed milestones (milestone method). If the outcome of a construction contract cannot yet be estimated reliably, contract revenue is recognized only in the amount of the contract costs incurred to date (zero profit method). In the balance sheet, contract components whose revenue is recognized using the percentage of completion method are reported as trade receivables, net of prepayments received. Expected

232 228 Notes to the Consolidated Financial Statements Consolidated Financial Statements losses from construction contracts are recognized immediately in full as expenses by recognizing impairment losses on recognized contract assets, and additionally by recognizing provisions for amounts in excess of the impairment losses. Dividend income is recognized on the date when the dividend is legally approved. GOVERNMENT GRANTS Government grants related to assets are deducted when arriving at the carrying amount of the asset and are recognized in profit or loss over the life of the depreciable asset as a reduced depreciation expense. If the Group becomes entitled to a grant subsequently, the amount of the grant attributable to prior periods is recognized in profit or loss. Government grants related to income, i.e. that compensate the Group for expenses incurred, are recognized in profit or loss for the period in those items in which the expenses to be compensated by the grants are also recognized. Grants in the form of nonmonetary assets (e.g. the use of land free of charge or the transfer of resources free of charge) are disclosed as a memo item. ESTIMATES AND ASSUMPTIONS BY MANAGEMENT Preparation of the consolidated financial statements requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, and income and expenses, as well as the related disclosure of contingent assets and liabilities of the reporting period. The estimates and assumptions relate largely to the following matters: The impairment testing of nonfinancial assets (especially goodwill, brand names, capitalized development costs and special tools) and equity-accounted investments, or investments accounted at cost, and the measurement of options on shares in companies that are not traded in an active market require assumptions about the future cash flows during the planning period, and possibly beyond it, as well as about the discount rate to be applied. The estimates made in order to separate cash flows mainly relate to future market shares, the trend in the respective markets and the profitability of the Volkswagen Group s products. In addition, the recoverability of the Group s lease assets depends in particular on the residual value of the leased vehicles after expiration of the lease term, because this represents a significant portion of the expected cash flows. More detailed information on impairment tests and the measurement parameters used for those tests can be found in the explanations on the accounting policies for intangible assets. If there are no observable market inputs, the fair values of assets acquired and liabilities assumed in a business combination are measured using recognized valuation techniques, such as the relief-from-royalty method or the residual method. Impairment testing of financial assets requires estimates about the extent and probability of occurrence of future events. As far as possible, estimates are derived from past experience taking into account current market data as well as rating categories and scoring information. In the case of financial services receivables, both specific and portfolio-based valuation allowances are recognized. The more detailed balance sheet disclosures on IFRS 7 (Financial Instruments) contain an overview of these specific and portfolio-based valuation allowances. Accounting for provisions is also based on estimates of the extent and probability of occurrence of future events, as well as estimates of the discount rate. As far as possible, these are also based on past experience or external opinions. The assumptions applied in the measurement of pension provisions are described in the Provisions for pensions and other post-employment benefits section. Remeasurements are recognized in other comprehensive income and do not affect profit or loss reported in the income statement. Any change in the estimates of the amount of other provisions is always recognized in profit or loss. The provisions are regularly adjusted to reflect new information obtained. The use of expected values means that additional amounts must frequently be recognized for provisions, or that unused provisions are reversed. Reversals of provisions are recognized as other operating income, whereas expenses relating to the recognition of provisions are allocated directly to the functions. Warranty claims from sales transactions are calculated on the basis of losses to date, estimated future losses and the policy on ex gratia arrangements. This requires assumptions to be made about the nature and extent of future guarantee and ex gratia claims. Assumptions were made in respect of the provisions recognized in connection with the diesel issues. These depend on the series, model year and country concerned and relate in particular to the effort, material costs and hourly wage rates involved, or to vehicle values in the case of repurchases. In addition, assumptions are made about future

233 Consolidated Financial Statements Notes to the Consolidated Financial Statements 229 resale prices of repurchased vehicles. They are based on qualified estimates, which are based in turn on external data, and also reflect additional information available internally, such as values derived from past experience. An overview of other provisions can be found in the Noncurrent and current other provisions section. Further information on the legal proceedings and on the legal risks associated with the diesel issue can be found in the Litigation section. The put options and compensation rights of free float shareholders recognized within liabilities depend in particular on the outcome of the MAN award proceedings. The liability was based on estimates of the length of the award proceedings and the amount of the put options and compensation rights. The length was estimated based on the fact that proceedings take seven years on average. The amount of the put options and compensation rights of MAN s free float shareholders is derived from the cash settlement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act). Government grants are recognized based on an assessment as to whether there is reasonable assurance that the Group companies will fulfill the attached conditions and the grants will be awarded. This assessment is based on the nature of the legal entitlement and past experience. Estimates of the useful life of finite-lived assets are based on past experience and are reviewed regularly. Where estimates are modified the residual useful life is adjusted and an impairment loss is recognized, if necessary. Measuring deferred tax assets requires assumptions regarding future taxable income and the timing of the realization of deferred tax assets. The estimates and assumptions are based on underlying assumptions that reflect the current state of available knowledge. Specifically, the expected future development of business was based on the circumstances known at the date of preparation of these consolidated financial statements and a realistic assessment of the future development of the global and sector-specific environment. Our estimates and assumptions remain subject to a high degree of uncertainty because future business developments are subject to uncertainties that in part cannot be influenced by the Group. This applies in particular to short- and medium-term cash flow forecasts and to the discount rates used. Developments in this environment that differ from the assumptions and that cannot be influenced by management could result in amounts that differ from the original estimates. If actual developments differ from the expected developments, the underlying assumptions and, if necessary, the carrying amounts of the assets and liabilities affected are adjusted. Global gross domestic product (GDP) rose by 3.2% (previous year: 2.5%) in In our forecasts, we assume that global economic growth will weaken slightly in As a result, from today s perspective, we are not expecting material adjustments in the following fiscal year in the carrying amounts of the assets and liabilities reported in the consolidated balance sheet. Estimates and assumptions by management were based in particular on assumptions relating to the development of the general economic environment, the automotive markets and the legal environment. These and further assumptions are explained in detail in the Report on Expected Developments, which is part of the Group Management Report.

234 230 Notes to the Consolidated Financial Statements Consolidated Financial Statements Segment reporting Segments are identified on the basis of the Volkswagen Group s internal management and reporting. In line with the Group s multibrand strategy, each of its brands (operating segments) is managed by its own board of management. The Group targets and requirements laid down by the Board of Management of Volkswagen AG must be complied with. Segment reporting comprises four reportable segments: Passenger Cars, Commercial Vehicles, Power Engineering and Financial Services. The activities of the Passenger Cars segment cover the development of vehicles and engines, the production and sale of passenger cars, and the corresponding genuine parts business. Given the high degree of technological and economic interlinking in the production network of the individual brands, the Passenger Cars reporting segment combines the Volkswagen Group s individual car brands to a single reportable segment. Furthermore, there is collaboration within key areas such as procurement, research and development or treasury. The Commercial Vehicles segment primarily comprises the development, production and sale of light commercial vehicles, trucks and buses, the corresponding genuine parts business and related services. Just as in the case of the car brands, there is collaboration within the areas procurement, development and sale. The aim is to achieve further forms of interlinking. The activities of the Power Engineering segment consist of the development and production of large-bore diesel engines, turbo compressors, industrial turbines and chemical reactor systems, as well as the production of gear units, propulsion components and testing systems. The activities of the Financial Services segment comprise dealer and customer financing, leasing, banking and insurance activities, fleet management and mobility services. In this segment, combinations occur especially while taking into account the comparability of the type of services as well as the regulatory situation permits. Purchase price allocation for companies acquired is allocated directly to the corresponding segments. At Volkswagen, segment profit or loss is measured on the basis of the operating result. In the segment reporting, the share of the result of joint ventures is contained in the share of the result of equity-accounted investments in the corresponding segments. The reconciliation contains activities and other operations that by definition do not constitute segments. It also includes the unallocated Group financing activities. Consolidation adjustments between the segments are also contained in the reconciliation. Investments in intangible assets, property, plant and equipment, and investment property are reported net of investments under finance leases. As a matter of principle, business relationships between the companies within the segments of the Volkswagen Group are transacted at arm s length prices.

235 Consolidated Financial Statements Notes to the Consolidated Financial Statements 231 REPORTING SEGMENTS 2016 million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 160,461 25,385 3,590 27, , ,267 Intersegment sales revenue 17,354 6, ,367 27,418 27,418 Total sales revenue 177,815 32,080 3,593 31, ,739 27, ,267 Depreciation and amortization 10,846 2, ,224 19, ,572 Impairment losses , ,368 Reversal of impairment losses Segment result (operating result) 5, ,435 8,171 1,068 7,103 Share of the result of equity-accounted investments 3, , ,497 Net interest result and other financial result 1, ,152 1,157 3,308 Equity-accounted investments 7, ,616 8,616 Investments in intangible assets, property, plant and equipment, and investment property 15,891 2, , ,902 REPORTING SEGMENTS 2017 million Passenger Cars Commercial Vehicles Power Engineering Financial Services Total segments Reconciliation Volkswagen Group Sales revenue from external customers 169,513 27,632 3,280 30, , ,682 Intersegment sales revenue 18,892 7, ,541 30,004 30,004 Total sales revenue 188,405 35,200 3,283 33, ,621 29, ,682 Depreciation and amortization 11,363 2, ,797 21, ,941 Impairment losses , ,280 Reversal of impairment losses Segment result (operating result) 12,644 1, ,673 17,153 3,335 13,818 Share of the result of equity-accounted investments 3, ,482 3,482 Net interest result and other financial result 1, ,321 1,067 3,388 Equity-accounted investments 6, ,205 8,205 Investments in intangible assets, property, plant and equipment, and investment property 15,713 1, , ,313

236 232 Notes to the Consolidated Financial Statements Consolidated Financial Statements RECONCILIATION million Segment sales revenue 260, ,739 Unallocated activities Group financing Consolidation 30,912 28,263 Group sales revenue 230, ,267 Segment result (operating result) 17,153 8,171 Unallocated activities Group financing Consolidation 3,328 1,176 Operating result 13,818 7,103 Financial result Consolidated result before tax 13,913 7,292 BY REGION 2016 million Germany Europe/Other markets¹ North America South America Asia- Pacific Total Sales revenue from external customers 43,634 94,445 35,454 7,973 35, ,267 Intangible assets, property, plant and equipment, lease assets and investment property 84,525 40,717 23,958 3,320 3, ,583 1 Excluding Germany. BY REGION 2017 million Germany Europe/Other markets¹ North America South America Asia- Pacific Total Sales revenue from external customers 44,333 98,420 38,818 9,988 39, ,682 Intangible assets, property, plant and equipment, lease assets and investment property 89,594 37,050 26,076 2,851 2, ,384 1 Excluding Germany. Allocation of sales revenue to the regions follows the destination principle.

237 Consolidated Financial Statements Notes to the Consolidated Financial Statements 233 Income statement disclosures 1. Sales revenue STRUCTURE OF GROUP SALES REVENUE million Vehicles 145, ,293 Genuine parts 15,628 15,220 Used vehicles and third-party products 13,355 13,324 Engines, powertrains and parts deliveries 11,318 9,770 Power Engineering 3,280 3,590 Motorcycles Leasing business 24,570 22,306 Interest and similar income 7,119 6,695 Other sales revenue 8,853 8, , ,267 For segment reporting purposes, the sales revenue of the Group is presented by segment and market. Other sales revenue comprises revenue from workshop services and license revenue, among other things. Sales revenue from construction contracts amounted to 965 million (previous year: 1,069 million) and mainly related to the Power Engineering segment. 2. Cost of sales Cost of sales includes interest expenses of 1,961 million (previous year: 1,930 million) attributable to the financial services business. This item also includes impairment losses on intangible assets (primarily development costs), property, plant and equipment (primarily other equipment, operating and office equipment), and lease assets in the amount of 1,185 million (previous year: 1,369 million). The impairment losses amounting to a total of 700 million recognized during the reporting period on intangible assets and items of property, plant and equipment result in particular from lower values in use of various products in the Passenger Cars segment, from market and exchange rate risks, and in particular from expected declines in volumes. The impairment losses on lease assets in the amount of 485 million (including 37 million reported in current lease assets), which are attributable predominantly to the Financial Services segment, are based on constantly updated internal and external information that is factored into the forecast residual values of the vehicles. Government grants related to income amounted to 424 million in the fiscal year (previous year: 435 million) and were generally allocated to the functions.

238 234 Notes to the Consolidated Financial Statements Consolidated Financial Statements 3. Distribution expenses Distribution expenses amounting to 22.7 billion (previous year: 22.7 billion) include nonstaff overheads and personnel costs, and depreciation and amortization applicable to the distribution function, as well as the costs of shipping, advertising and sales promotions. 4. Administrative expenses The administrative expenses of 8.3 billion (previous year: 7.3 billion) mainly include nonstaff overheads and personnel costs, as well as depreciation and amortization applicable to the administrative function. 5. Other operating income million Income from reversal of valuation allowances on receivables and other assets 1, Income from reversal of provisions and accruals 4,384 3,738 Income from foreign currency hedging derivatives 2,259 1,739 Income from foreign exchange gains 2,656 2,842 Income from sale of promotional material Income from cost allocations 1,386 1,222 Income from investment property Gains on asset disposals and the reversal of impairment losses Miscellaneous other operating income 2,041 1,843 14,500 13,049 Income from the reversal of provisions and accrued liabilities is mainly attributable to a reduction in provisions. A further breakdown can be found in the Noncurrent and current other provisions section. Foreign exchange gains mainly comprise gains from changes in exchange rates between the dates of recognition and payment of receivables and liabilities denominated in foreign currencies, as well as exchange rate gains resulting from measurement at the closing rate. Foreign exchange losses from these items are included in other operating expenses.

239 Consolidated Financial Statements Notes to the Consolidated Financial Statements Other operating expenses million Valuation allowances on receivables and other assets 1,650 1,787 Losses from foreign currency hedging derivatives 1,753 2,964 Foreign exchange losses 2,839 3,077 Expenses from cost allocations Expenses for termination agreements Losses on disposal of noncurrent assets Miscellaneous other operating expenses 5,197 7,970 12,259 16,907 Miscellaneous other operating expenses consist of litigation expenses of 1.0 billion (previous year: 5.1 billion) in connection with the diesel issue. In the previous year, they had also included provisions of 0.4 billion for the antitrust proceedings that the European Commission opened against European truck manufacturers including MAN and Scania. The prior-year expenses for termination agreements result primarily from the restructuring expenses for the South American market and at MAN. In addition, the changes in the currency hedging derivatives are due to the exchange rate changes between the trade price and the price on realization; this applies in particular to the US dollar, the Chinese renminbi and sterling. 7. Share of the result of equity-accounted investments million Share of profits of equity-accounted investments 3,519 3,563 of which: from joint ventures (3,327) (3,534) of which: from associates (191) (29) Share of losses of equity-accounted investments of which: from joint ventures (2) of which: from associates (34) (66) 3,482 3,497

240 236 Notes to the Consolidated Financial Statements Consolidated Financial Statements 8. Interest result million ¹ Interest income 951 1,285 Other interest and similar income Income from valuation of interest derivatives Interest expenses 2,317 2,955 Other interest and similar expenses 1,305 1,400 Expenses from valuation of interest derivatives Interest cost included in lease payments Interest result on other liabilities Net interest on the net defined benefit liability Interest result 1,366 1,670 1 Prior-year figures adjusted. To enhance comparability, the structure within the financial result has been changed. The presentation of finance costs has been replaced with the interest result. The new structure has led to changes in various items in the financial result. Specifically, the realized expenses from loan receivables and liabilities in foreign currency reported in the finance cost item in previous years have been reclassified to other financial result. In addition, income and expenses from the measurement and realization of interest rate risk, which were previously reported in income and expenses from fair value changes relating to hedging transactions within hedge accounting are now presented in the interest result. The prior-year figures for other financial result have been adjusted accordingly by an amount of 1.6 billion. 9. Other financial result million Income from profit and loss transfer agreements Cost of loss absorption Other income from equity investments Other expenses from equity investments Income from marketable securities and loans 1, Realized income of loan receivables and payables in foreign currency Realized expenses of loan receivables and payables in foreign currency 1, Gains and losses from remeasurement and impairment of financial instruments Gains and losses from fair value changes of derivatives not included in hedge accounting 810 1,148 Gains and losses from fair value changes of derivatives included in hedge accounting Other financial result¹ 2,022 1,638 1 Prior-year figures adjusted. 2 Including disposal gains/losses.

241 Consolidated Financial Statements Notes to the Consolidated Financial Statements Income tax income/expense COMPONENTS OF TAX INCOME AND EXPENSE million Current tax expense, Germany Current tax expense, abroad 2,590 2,388 Current income tax expense 3,205 3,273 of which prior-period income ( )/expense (+) (216) (188) Deferred tax income ( )/expense (+), Germany Deferred tax income ( )/expense (+), abroad 1, Deferred tax income ( )/expense (+) 930 1,361 Income tax income/expense 2,275 1,912 The statutory corporation tax rate in Germany for the 2017 assessment period was 15%. Including trade tax and the solidarity surcharge, this resulted in an aggregate tax rate of 29.9% (previous year: 29.9%). A tax rate of 29.9% (previous year: 29.9%) was used to measure deferred taxes in the German consolidated tax group. The local income tax rates applied for companies outside Germany vary between 0% and 45%. In the case of split tax rates, the tax rate applicable to undistributed profits is applied. The realization of tax benefits from tax loss carryforwards from previous years resulted in a reduction in current income taxes in 2017 of 422 million (previous year: 146 million). Previously unused tax loss carryforwards amounted to 14,931 million (previous year: 17,686 million). Tax loss carryforwards amounting to 9,660 million (previous year: 11,494 million) can be used indefinitely, while 3,834 million (previous year: 4,237 million) must be used within the next ten years. There are additional tax loss carryforwards amounting to 1,437 million (previous year: 1,956 million) that can be used within a period of 15 or 20 years. Tax loss carryforwards of 7,222 million (previous year: 6,380 million) were estimated not to be usable overall. Of these, 343 million (previous year: 276 million) will expire within five years, 2,152 million (previous year: 2,341 million) within 6 to 20 years and 93 million (previous year: 38 million) after 20 years. Tax loss carryforwards of 4,634 million (previous year: 3,725 million) that are estimated not to be usable will not expire. The benefit arising from previously unrecognized tax losses or tax credits of a prior period that is used to reduce current tax expense in the current fiscal year amounts to 114 million (previous year: 135 million). Deferred tax expense was reduced by 75 million (previous year: 211 million) because of a benefit arising from previously unrecognized tax losses and tax credits of a prior period. Deferred tax expense resulting from the write-down of a deferred tax asset amounts to 130 million (previous year: 297 million). Deferred tax income resulting from the reversal of a write-down of deferred tax assets amounts to 40 million (previous year: 304 million). Tax credits granted by various countries amounted to 500 million (previous year: 756 million). No deferred tax assets were recognized for deductible temporary differences of 1,028 million (previous year: 1,533 million) and for tax credits of 228 million (previous year: 353 million) that would expire in the next 20 years, or for tax credits of 0 million (previous year: 65 million) that will not expire. In accordance with IAS 12.39, deferred tax liabilities of 266 million (previous year: 326 million) for temporary differences and undistributed profits of Volkswagen AG subsidiaries were not recognized because control exists. Due to the change in the statutory provisions in Germany, a refund claim for corporation tax was recognized as a current tax asset for the first time in fiscal year As of the balance sheet date, the previous year s refund claim ( 134 million) had been amortized in full.

242 238 Notes to the Consolidated Financial Statements Consolidated Financial Statements Deferred tax income resulting from changes in tax rates amounted to 1,044 million at Group level (previous year: expense of 120 million). This is primarily attributable to the effects of the tax reform in the United States. Deferred taxes in respect of temporary differences and tax loss carryforwards of 8,344 million (previous year: 9,890 million) were recognized without being offset by deferred tax liabilities in the same amount. The deferred tax assets of companies within the German tax group were recognized due to positive results in the past and are included in this analysis. The companies concerned are expecting positive tax income in the future, following losses in the reporting period or the previous year. 3,655 million (previous year: 5,486 million) of the deferred taxes recognized in the balance sheet was credited to equity and relates to other comprehensive income. 2 million (previous year: 3 million) of this figure is attributable to noncontrolling interests. In the fiscal year under review, changes of 3 million arising from items that will not be reclassified to profit or loss were recognized directly in equity. Changes in deferred taxes classified by balance sheet item are presented in the statement of comprehensive income. In fiscal year 2017, tax effects of 8 million resulting from equity transaction costs were recognized in equity. DEFERRED TAXES CLASSIFIED BY BALANCE SHEET ITEM The following recognized deferred tax assets and liabilities were attributable to recognition and measurement differences in the individual balance sheet items and to tax loss carryforwards: DEFERRED TAX ASSETS DEFERRED TAX LIABILITIES million Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016 Intangible assets ,055 9,884 Property, plant and equipment, and lease assets 4,567 4,387 6,017 8,315 Noncurrent financial assets Inventories 2,653 2, Receivables and other assets (including Financial Services Division) 1,879 2,107 8,889 7,273 Other current assets 3,884 2, Pension provisions 6,652 6, Liabilities and other provisions 9,603 10,746 4,109 2,750 Valuation allowances on deferred tax assets from temporary differences Temporary differences, net of valuation allowances 29,307 28,967 29,963 29,152 Tax loss carryforwards, net of valuation allowances 2,090 3,365 Tax credits, net of valuation allowances Value before consolidation and offset 31,670 32,670 29,963 29,152 of which noncurrent (18,858) (21,736) (22,863) (23,681) Offset 24,816 25,198 24,816 25,198 Consolidation 2,956 2, Amount recognized 9,810 9,756 5,636 4,745

243 Consolidated Financial Statements Notes to the Consolidated Financial Statements 239 In accordance with IAS 12, deferred tax assets and liabilities are offset if, and only if, they relate to income taxes levied by the same taxation authority and relate to the same tax period. The tax expense reported for 2017 of 2,275 million (previous year: 1,912 million) was 1,885 million lower (previous year: 268 million lower) than the expected tax expense of 4,160 million that would have resulted from application of a tax rate for the Group of 29.9% (previous year: 29.9%) to the earnings before tax of the Group. RECONCILIATION OF EXPECTED TO EFFECTIVE INCOME TAX million Profit before tax 13,913 7,292 Expected income tax income ( ) / expense (+) (tax rate 29.9%; previous year: 29.9%) 4,160 2,180 Reconciliation: Effect of different tax rates outside Germany Proportion of taxation relating to: tax-exempt income 1,237 1,226 expenses not deductible for tax purposes effects of loss carryforwards and tax credits permanent differences 5 12 Tax credits Prior-period tax expense Effect of tax rate changes 1, Nondeductible withholding tax Other taxation changes Effective income tax expense 2,275 1,912 The tax expense recognized in the fiscal year was reduced by 1,007 million on the basis of the tax reform passed in the United States, which envisages a reduction in the corporate income tax rate from 35% to 21%, among other things. The reduction resulted mainly from the remeasurement of deferred taxes of subsidiaries in the United States.

244 240 Notes to the Consolidated Financial Statements Consolidated Financial Statements 11. Earnings per share Basic earnings per share are calculated by dividing earnings attributable to Volkswagen AG shareholders by the weighted average number of ordinary and preferred shares outstanding during the reporting period. Since the basic and diluted number of shares is identical, basic earnings per share also correspond to diluted earnings per share. Article 27(2) No. 1 of the Articles of Association of Volkswagen AG sets out that, even in the event of a deficit, a preferred dividend of 0.11 per preferred share must be paid out in the subsequent fiscal years based on the cumulative arrangement if no dividend is paid for the year under review; consequently, this must be factored into the calculation of earnings per share for the current fiscal year. The dividend proposal that is based on Volkswagen AG s net income for the year under the German Commercial Code is not relevant for the calculation of earnings per share in accordance with IAS 33. The distribution of further dividends in accordance with Article 27(2) Nos. 2 and 3 of the Articles of Association of Volkswagen AG, whereby, in the case of a full distribution, the dividend paid for each preferred share is 0.06 higher than that paid for each ordinary share, is only included in the calculation of earnings per share if there is a profit after tax attributable to the shareholders of Volkswagen AG. ORDINARY PREFERRED Quantity Weighted average number of shares outstanding basic 295,089, ,089, ,205, ,205,445 Weighted average number of shares outstanding diluted 295,089, ,089, ,205, ,205,445 million Earnings after tax 11,638 5,379 Noncontrolling interests Earnings attributable to Volkswagen AG hybrid capital investors Earnings attributable to Volkswagen AG shareholders 11,354 5,144 Basic earnings attributable to ordinary shares 6,676 3,021 Diluted earnings attributable to ordinary shares 6,676 3,021 Basic earnings attributable to preferred shares 4,678 2,123 Diluted earnings attributable to preferred shares 4,678 2, Basic earnings per ordinary share Diluted earnings per ordinary share Basic earnings per preferred share Diluted earnings per preferred share

245 Consolidated Financial Statements Notes to the Consolidated Financial Statements 241 Additional Income Statement Disclosures in accordance with IAS 23 (Borrowing Costs) Capitalized borrowing costs amounted to 83 million (previous year: 83 million) and related mainly to capitalized development costs. An average cost of debt of 1.5% (previous year: 1.5%) was used as a basis for capitalization in the Volkswagen Group. Additional Income Statement Disclosures in accordance with IFRS 7 (Financial Instruments) CLASSES OF FINANCIAL INSTRUMENTS Financial instruments are divided into the following classes at the Volkswagen Group: > financial instruments measured at fair value, > financial instruments measured at amortized cost and > financial instruments not falling within the scope of IFRS 7. Financial instruments not falling within the scope of IFRS 7 include in particular investments in associates and joint ventures accounted for using the equity method. NET GAINS OR LOSSES FROM FINANCIAL INSTRUMENTS BY IAS 39 MEASUREMENT CATEGORY million Financial instruments at fair value through profit or loss 840 1,203 Loans and receivables¹ 2,105 3,434 Available-for-sale financial assets Financial liabilities measured at amortized cost 1,689 3,480 2,748 1,288 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled Noncurrent and current financial services receivables. Net gains and losses from financial assets and liabilities at fair value through profit or loss are composed of the fair value measurement gains and losses on derivatives, including interest and gains and losses on currency translation. Net gains and losses from available-for-sale financial assets primarily comprise income and expenses from marketable securities including disposal gains/losses, impairment losses on investments and currency translation effects. Net gains and losses from loans and receivables and from financial liabilities carried at amortized cost comprise interest income and expenses in accordance with the effective interest method under IAS 39, including currency translation effects. Interest also includes interest income and expenses from the lending business of the financial services operations.

246 242 Notes to the Consolidated Financial Statements Consolidated Financial Statements TOTAL INTEREST INCOME AND EXPENSES ATTRIBUTABLE TO FINANCIAL INSTRUMENTS NOT MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS million Interest income¹ 4,794 4,670 Interest expenses 3,509 3,534 1,285 1,136 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled Noncurrent and current financial services receivables. IMPAIRMENT LOSSES ON FINANCIAL ASSETS BY CLASS million Measured at fair value 3 18 Measured at amortized cost 1,628 1,707 1,631 1,725 Impairment losses relate to write-downs of financial assets, such as valuation allowances on receivables and marketable securities. Interest income on impaired financial assets amounted to 56 million in the fiscal year (previous year: 48 million). In fiscal year 2017, 3 million (previous year: 3 million) was recognized as an expense and 58 million (previous year: 67 million) as income from fees and commissions for trust activities and from financial assets and liabilities not measured at fair value that are not accounted for using the effective interest method.

247 Consolidated Financial Statements Notes to the Consolidated Financial Statements 243 Balance sheet disclosures 12. Intangible assets CHANGES IN INTANGIBLE ASSETS IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2016 million Brand names Goodwill Capitalized development costs for products under development Capitalized development costs for products currently in use Other intangible assets Total Cost Balance at Jan. 1, ,062 23,646 6,781 23,681 8,529 79,699 Foreign exchange differences Changes in consolidated Group Additions 4, ,135 Transfers 4,324 4, Disposals , ,925 Balance at Dec. 31, ,024 23,559 7,285 27,366 8,637 83,870 Amortization and impairment Balance at Jan. 1, ,968 5,472 18,553 Foreign exchange differences Changes in consolidated Group 7 7 Additions to cumulative amortization 3 3, ,187 Additions to cumulative impairment losses Transfers Disposals , ,855 Reversal of impairment losses Balance at Dec. 31, ,040 6,109 21,271 Carrying amount at Dec. 31, ,941 23,558 7,246 12,326 2,527 62,599

248 244 Notes to the Consolidated Financial Statements Consolidated Financial Statements CHANGES IN INTANGIBLE ASSETS IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2017 million Brand names Goodwill Capitalized development costs for products under development Capitalized development costs for products currently in use Other intangible assets Total Cost Balance at Jan. 1, ,024 23,559 7,285 27,366 8,637 83,870 Foreign exchange differences Changes in consolidated Group Additions 4,080 1, ,788 Transfers 4,197 4, Disposals , ,890 Balance at Dec. 31, ,995 23,443 7,115 28,952 8,588 85,093 Amortization and impairment Balance at Jan. 1, ,040 6,109 21,271 Foreign exchange differences Changes in consolidated Group Additions to cumulative amortization 3 3, ,178 Additions to cumulative impairment losses Transfers 2 2 Disposals 7 3, ,827 Reversal of impairment losses Balance at Dec. 31, ,999 6,496 21,674 Carrying amount at Dec. 31, ,911 23,442 7,020 13,953 2,093 63,419 Other intangible assets comprise in particular concessions, purchased customer lists and dealer relationships, industrial and similar rights, and licenses in such rights and assets.

249 Consolidated Financial Statements Notes to the Consolidated Financial Statements 245 The allocation of the brand names and goodwill to the operating segments is shown in the following table: million Brand names by operating segment Porsche 13,823 13,823 Scania Vehicles and Services 990 1,017 MAN Truck & Bus 1,127 1,127 MAN Diesel & Turbo Ducati Other ,911 16,941 Goodwill by operating segment Porsche 18,825 18,825 Scania Vehicles and Services 2,866 2,947 MAN Truck & Bus MAN Diesel & Turbo Ducati ŠKODA Porsche Holding Salzburg Other ,442 23,558 The impairment test for recognized goodwill is based on value in use. Recoverability is not affected by a variation in the growth forecast with respect to the perpetual annuity or in the discount rate of +/ 0.5 percentage points. Research and development costs developed as follows: million % Total research and development costs 13,141 13, of which: capitalized development costs 5,260 5, Capitalization ratio in % Amortization of capitalized development costs 3,734 3, Research and development costs recognized in profit or loss 11,614 11,

250 246 Notes to the Consolidated Financial Statements Consolidated Financial Statements 13. Property, plant and equipment CHANGES IN PROPERTY, PLANT AND EQUIPMENT IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2016 million Land, land rights and buildings, including buildings on third-party land Technical equipment and machinery Other equipment, operating and office equipment Payments on account and assets under construction Total Cost Balance at Jan. 1, ,036 39,836 58,243 7, ,832 Foreign exchange differences ,206 Changes in consolidated Group Additions 742 1,843 5,150 5,025 12,760 Transfers 1,639 2,296 1,879 5, Disposals 154 1,076 1, ,461 Balance at Dec. 31, ,534 43,353 64,595 7, ,490 Depreciation and impairment Balance at Jan. 1, ,789 28,148 45, ,661 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation 1,000 2,918 4,707 8,625 Additions to cumulative impairment losses Transfers Disposals 81 1,011 1, ,164 Reversal of impairment losses Balance at Dec. 31, ,887 30,531 49, ,456 Carrying amount at Dec. 31, ,647 12,822 14,596 6,969 54,033 of which assets leased under finance leases Carrying amount at Dec. 31, Future finance lease payments due, and their present values, are shown in the following table: million from 2022 Total Finance lease payments Interest component of finance lease payments Carrying amount of liabilities

251 Consolidated Financial Statements Notes to the Consolidated Financial Statements 247 CHANGES IN PROPERTY, PLANT AND EQUIPMENT IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2017 million Land, land rights and buildings, including buildings on third-party land Technical equipment and machinery Other equipment, operating and office equipment Payments on account and assets under construction Total Cost Balance at Jan. 1, ,534 43,353 64,595 7, ,490 Foreign exchange differences , ,473 Changes in consolidated Group Additions 630 1,355 5,056 5,474 12,516 Transfers 1,063 2,509 1,829 5, Disposals , ,452 Balance at Dec. 31, ,335 45,450 68,909 6, ,569 Depreciation and impairment Balance at Jan. 1, ,887 30,531 49, ,456 Foreign exchange differences ,508 Changes in consolidated Group Additions to cumulative depreciation 1,058 3,211 5,152 9,421 Additions to cumulative impairment losses Transfers Disposals , ,068 Reversal of impairment losses Balance at Dec. 31, ,621 32,286 53, ,327 Carrying amount at Dec. 31, ,714 13,164 15,557 6,807 55,243 of which assets leased under finance leases Carrying amount at Dec. 31, Options to purchase buildings and plant leased under the terms of finance leases exist in most cases, and are also expected to be exercised. Future finance lease payments due, and their present values, are shown in the following table: million from 2023 Total Finance lease payments Interest component of finance lease payments Carrying amount of liabilities For assets leased under operating leases, payments recognized in the income statement amounted to 1,449 million (previous year: 1,498 million). With respect to internally used assets, 1,302 million (previous year: 1,320 million) of this figure is attributable to minimum lease payments and 55 million (previous year: 60 million) to contingent lease payments. The payments of 92 million (previous year: 118 million) under subleases primarily relate to minimum lease payments.

252 248 Notes to the Consolidated Financial Statements Consolidated Financial Statements Government grants of 135 million (previous year: 218 million) were deducted from the cost of property, plant and equipment and noncash benefits received amounting to 12 million (previous year: 12 million) were not capitalized as the cost of assets. Real property liens of 916 million (previous year: 762 million) are pledged as collateral for financial liabilities related to land and buildings. 14. Lease assets and investment property CHANGES IN LEASE ASSETS AND INVESTMENT PROPERTY IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2016 million Leasing assets Investment property Total Cost Balance at Jan. 1, , ,879 Foreign exchange differences Changes in consolidated Group Additions 20, ,661 Transfers Disposals 14, ,673 Balance at Dec. 31, , ,262 Depreciation and impairment Balance at Jan. 1, , ,202 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation 6, ,760 Additions to cumulative impairment losses Transfers Disposals 6, ,101 Reversal of impairment losses Balance at Dec. 31, , ,312 Carrying amount at Dec. 31, , ,950 The following payments from noncancelable leases and rental agreements were expected to be received over the coming years: million from 2022 Total Lease payments 3,649 4, ,464

253 Consolidated Financial Statements Notes to the Consolidated Financial Statements 249 CHANGES IN LEASE ASSETS AND INVESTMENT PROPERTY IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2017 million Leasing assets Investment property Total Cost Balance at Jan. 1, , ,262 Foreign exchange differences 3, ,129 Changes in consolidated Group Additions 21, ,336 Transfers Disposals 16, ,641 Balance at Dec. 31, , ,973 Depreciation and impairment Balance at Jan. 1, , ,312 Foreign exchange differences Changes in consolidated Group Additions to cumulative depreciation 7, ,343 Additions to cumulative impairment losses Transfers Disposals 6, ,779 Reversal of impairment losses Balance at Dec. 31, , ,251 Carrying amount at Dec. 31, , ,722 Lease assets include assets leased out under the terms of operating leases and assets covered by long-term buyback agreements. Investment property includes apartments rented out and leased dealerships with a fair value of 993 million (previous year: 1,150 million). Fair value is estimated using an investment method based on internal calculations (Level 3 of the fair value hierarchy). Operating expenses of 52 million (previous year: 46 million) were incurred for the maintenance of investment property in use. Expenses of 3 million (previous year: 1 million) were incurred for unused investment property. The following payments from noncancelable leases and rental agreements are expected to be received over the coming years: million from 2023 Total Lease payments 3,392 4, ,112

254 250 Notes to the Consolidated Financial Statements Consolidated Financial Statements 15. Equity-accounted investments and other equity investments CHANGES IN EQUITY-ACCOUNTED INVESTMENTS AND OTHER EQUITY INVESTMENTS IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2016 million Equity-accounted investments Other equity investments Total Gross carrying amount at Jan. 1, ,985 1,333 12,318 Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals 2, ,197 Changes recognized in profit or loss 3,250 3,250 Dividends 3,598 3,598 Other changes recognized in other comprehensive income Balance at Dec. 31, ,727 1,417 10,143 Impairment losses Balance at Jan. 1, Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals 1 1 Reversal of impairment losses 0 0 Balance at Dec. 31, Carrying amount at Dec. 31, , ,613

255 Consolidated Financial Statements Notes to the Consolidated Financial Statements 251 CHANGES IN EQUITY-ACCOUNTED INVESTMENTS AND OTHER EQUITY INVESTMENTS IN THE PERIOD JANUARY 1 TO DECEMBER 31, 2017 million Equity-accounted investments Other equity investments Total Gross carrying amount at Jan. 1, ,727 1,417 10,143 Foreign exchange differences Changes in consolidated Group Additions Transfers 0 0 Held for sale Disposals Changes recognized in profit or loss 3,495 3,495 Dividends 3,640 3,640 Other changes recognized in other comprehensive income Balance at Dec. 31, ,443 1,825 10,268 Impairment losses Balance at Jan. 1, Foreign exchange differences Changes in consolidated Group Additions Transfers Disposals Reversal of impairment losses 1 1 Balance at Dec. 31, Carrying amount at Dec. 31, ,205 1,318 9,523 Equity-accounted investments include joint ventures in the amount of 6,459 million (previous year: 7,068 million) and associates in the amount of 1,746 million (previous year: 1,548 million). The additions of equity-accounted investments are mainly attributable to the acquisition of the investment in Navistar in the amount of 0.3 billion (previous year: acquisition of investment in Gett and measurement of shares in GMH at the selling price). In the previous year, the disposals resulted from the divestment of LeasePlan by GMH. Further details can be found in the disclosures in the section entitled Basis of consolidation. Of the other changes recognized in other comprehensive income, 249 million (previous year: 132 million) is attributable to joint ventures and 2 million (previous year: 1 million) to associates. They are mainly the result of foreign exchange differences in the amount of 327 million (previous year: 156 million), pension plan remeasurements in the amount of 112 million (previous year: 1 million) and losses on the fair value measurement of cash flow hedges in the amount of 30 million (previous year: 33 million).

256 252 Notes to the Consolidated Financial Statements Consolidated Financial Statements 16. Noncurrent and current financial services receivables CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE million Current Noncurrent Dec. 31, 2017 Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Dec. 31, 2016 Receivables from financing business Customer financing¹ 19,841 40,899 60,739 61,763 19,630 38,907 58,537 60,119 Dealer financing 17,033 2,194 19,227 19,200 15,531 2,108 17,639 17,626 Direct banking ,142 43,096 80,239 81,236 35,415 41,018 76,433 78,002 Receivables from operating leases Receivables from finance leases¹ 15,810 30,153 45,963 46,766 14,060 27,384 41,445 42,240 53,145 73, , ,195 49,673 68, , ,438 1 Prior-year figures adjusted. The receivables from customer financing and finance leases contained in financial services receivables of billion (previous year: billion) decreased by 31 million (previous year: 7 million) as a result of a fair value adjustment from portfolio hedging. The receivables from customer and dealer financing are secured by vehicles or real property liens. Of the receivables, 287 million (previous year: 251 million) was furnished as collateral for financial liabilities and contingent liabilities. The receivables from dealer financing include 51 million (previous year: 51 million) receivable from unconsolidated affiliated companies. In the consolidated financial statements, some of the receivables previously reported as customer financing in individual markets are now presented as receivables from finance leases. The prior-year figures have been restated, resulting in a 12.2 billion reduction in receivables from customer financing and a corresponding 12.2 billion increase in receivables from finance leases as of December 31, The adjustments as of January 1, 2016 amounted to 11.9 billion. In addition, the expected cash flows from finance leases have been adjusted accordingly. The receivables from finance leases almost entirely in respect of vehicles were or are expected to generate the following cash flows as of December 31, 2016 and December 31, 2017: million from 2022 Total Future payments from finance lease receivables 15,117 29, ,605 Unearned finance income from finance leases (discounting) 1,058 2, ,162 Present value of minimum lease payments outstanding at the reporting date 14,059 27, ,443

257 Consolidated Financial Statements Notes to the Consolidated Financial Statements 253 million from 2023 Total Future payments from finance lease receivables 16,952 32, ,377 Unearned finance income from finance leases (discounting) 1,142 2, ,414 Present value of minimum lease payments outstanding at the reporting date 15,810 30, ,963 Accumulated valuation allowances for uncollectible minimum lease payments receivable amount to 116 million (previous year: 94 million). 17. Noncurrent and current other financial assets CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Positive fair value of derivatives 2,845 4,091 6,936 2,317 3,274 5,591 Marketable securities Receivables from loans, bonds, profit participation rights (excluding interest) 5,367 2,531 7,898 5,352 2,338 7,690 Miscellaneous financial assets 3,786 1,829 5,615 4,175 2,598 6,773 11,998 8,455 20,453 11,844 8,256 20,099 Other financial assets include receivables from related parties of 7.7 billion (previous year: 6.9 billion). Other financial assets and noncurrent marketable securities amounting to 1,819 million (previous year: 1,870 million) were furnished as collateral for financial liabilities and contingent liabilities. There is no original right of disposal or pledge for the furnished collateral on the part of the collateral taker. In addition, the miscellaneous financial assets include cash and cash equivalents that serve as collateral (mainly under asset-backed securities transactions).

258 254 Notes to the Consolidated Financial Statements Consolidated Financial Statements The positive fair values of derivatives relate to the following items: million Dec. 31, 2017 Dec. 31, 2016 Transactions for hedging foreign currency risk from assets using fair value hedges foreign currency risk from liabilities using fair value hedges interest rate risk using fair value hedges interest rate risk using cash flow hedges foreign currency and price risk from future cash flows (cash flow hedges) 4,401 3,032 Hedging transactions 5,224 4,114 Assets related to derivatives not included in hedging relationships 1,712 1,477 6,936 5,591 The positive fair value of transactions for hedging price risk from future cash flows (cash flow hedges) amounted to million (previous year: 36 million). Positive fair values of 17 million (previous year: 1 million) were recognized from transactions for hedging interest rate risk (fair value hedges) used in portfolio hedges. Further details on derivative financial instruments as a whole are given in the section entitled Financial risk management and financial instruments". 18. Noncurrent and current other receivables CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Other recoverable income taxes 3, ,777 4, ,878 Miscellaneous receivables 1,465 1,356 2,821 1,093 1,169 2,261 5,346 2,252 7,598 5,130 2,009 7,139 Miscellaneous receivables include assets to fund post-employment benefits in the amount of 64 million (previous year: 46 million). This item also includes the share of the technical provisions attributable to reinsurers amounting to 73 million (previous year: 73 million). Current other receivables are predominantly non-interest-bearing.

259 Consolidated Financial Statements Notes to the Consolidated Financial Statements Tax assets CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Deferred tax assets 9,810 9,810 9,756 9,756 Tax receivables 1, ,746 1, ,518 1,339 10,217 11,557 1,126 10,148 11,274 7,456 million (previous year: 6,294 million) of the deferred tax assets are due within one year. 20. Inventories million Dec. 31, 2017 Dec. 31, 2016 Raw materials, consumables and supplies 4,858 4,396 Work in progress 4,143 4,408 Finished goods and purchased merchandise 26,514 25,719 Current lease assets 4,774 4,276 Prepayments ,415 38,978 At the same time as the relevant revenue was recognized, inventories in the amount of 173 billion (previous year: 166 billion) were included in cost of sales. Valuation allowances (excluding lease assets) recognized as expenses in the reporting period amounted to 878 million (previous year: 1,310 million). Vehicles amounting to 271 million (previous year: 263 million) were assigned as collateral for partial retirement obligations. 21. Trade receivables million Dec. 31, 2017 Dec. 31, 2016 Trade receivables from third parties 9,667 9,110 unconsolidated subsidiaries joint ventures 3,341 2,847 associates other investees and investors ,357 12,187 The fair values of the trade receivables correspond to the carrying amounts.

260 256 Notes to the Consolidated Financial Statements Consolidated Financial Statements The trade receivables include receivables from construction contracts accounted for using the percentage of completion (PoC) method. These are calculated as follows: million Dec. 31, 2017 Dec. 31, 2016 Contract costs and proportionate contract profit/loss of construction contracts 1, Progress billings Exchange rate effects 3 2 PoC receivables, gross 1, Prepayments received PoC receivables, net Other payments received on account of construction contracts in the amount of 270 million (previous year: 225 million), for which no construction costs have yet been incurred, are recognized under other liabilities. 22. Marketable securities The marketable securities serve to safeguard liquidity. Marketable securities are quoted, mainly short-term fixed-income securities and shares allocated to the available-for-sale financial assets category. 23. Cash, cash equivalents and time deposits million Dec. 31, 2017 Dec. 31, 2016 Bank balances 18,343 19,093 Checks, cash-in-hand, bills and call deposits ,457 19,265 Bank balances are held at various banks in different currencies and include time deposits, for example. 24. Equity The subscribed capital of Volkswagen AG is composed of no-par value bearer shares with a notional value of As well as ordinary shares, there are preferred shares that entitle the bearer to a 0.06 higher dividend than ordinary shares, but do not carry voting rights. Authorized capital of up to 110 million created by a resolution of the Annual General Meeting on April 19, 2012 for the issue of new ordinary bearer shares or preferred shares expired on April 18, Apart from an amount of 83 million, the authorized capital was utilized. The Annual General Meeting on May 5, 2015 resolved to create authorized capital of up to 179 million, expiring on May 4, 2020, to issue new preferred bearer shares.

261 Consolidated Financial Statements Notes to the Consolidated Financial Statements 257 In June 2017, Volkswagen AG placed unsecured subordinated hybrid notes with an aggregate principal amount of 3.5 billion via a subsidiary, Volkswagen International Finance N.V. Amsterdam, the Netherlands (VIF). The perpetual hybrid notes were issued in two tranches and can be called by VIF. The first call date for the first tranche ( 1.5 billion and a coupon of 2.700%) is after 5.5 years, and the first call date for the second tranche ( 2.0 billion and a coupon of 3.875%) is after ten years. Interest may be accumulated depending on whether a dividend is paid to Volkswagen AG shareholders. Under IAS 32, the hybrid notes must be classified in their entirety as equity. The capital raised was recognized in equity, less a discount and transaction costs and net of deferred taxes. The interest payments payable to the noteholders will be recognized directly in equity, net of income taxes. CHANGE IN ORDINARY AND PREFERRED SHARES AND SUBSCRIBED CAPITAL SHARES Balance at January 1 501,295, ,295,263 1,283,315,873 1,283,315,873 Capital increase Balance at December ,295, ,295,263 1,283,315,873 1,283,315,873 The capital reserves comprise the share premium totaling 14,225 million (previous year: 14,225 million) from capital increases, the share premium of 219 million from the issuance of bonds with warrants and an amount of 107 million appropriated on the basis of the capital reduction implemented in No amounts were withdrawn from the capital reserves. DIVIDEND PROPOSAL In accordance with section 58(2) of the Aktiengesetz (AktG German Stock Corporation Act), the dividend payment by Volkswagen AG is based on the net retained profits reported in the annual financial statements of Volkswagen AG prepared in accordance with the German Commercial Code. Based on these annual financial statements of Volkswagen AG, net retained profits of 2,181 million are eligible for distribution following the transfer of 2,174 million to the revenue reserves. The Board of Management and Supervisory Board will propose to the Annual General Meeting that a total dividend of 1,967 million, i.e per ordinary share and 3.96 per preferred share, be paid from the net retained profits. Shareholders are not entitled to a dividend payment until it has been resolved by the Annual General Meeting. A dividend of 2.00 per ordinary share and 2.06 per preferred share was distributed in fiscal year NONCONTROLLING INTERESTS As of December 31, 2017, total noncontrolling interests amounted to 229 million (previous year: 221 million). The noncontrolling interests in equity are attributable primarily to shareholders of RENK AG and AUDI AG and are immaterial individually and in the aggregate.

262 258 Notes to the Consolidated Financial Statements Consolidated Financial Statements 25. Noncurrent and current financial liabilities The details of noncurrent and current financial liabilities are presented in the following table: CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Bonds 14,146 48,971 63,118 18,831 33,191 52,022 Commercial paper and notes 22,506 13,399 35,905 23,173 18,004 41,178 Liabilities to banks 14,487 15,357 29,844 14,180 10,816 24,996 Deposits business 29,291 2,114 31,405 31,019 2,759 33,779 Loans and miscellaneous liabilities 1,363 1,358 2,721 1,204 1,102 2,306 Bills of exchange Finance lease liabilities ,844 81, ,472 88,461 66, , Noncurrent and current other financial liabilities CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Negative fair values of derivative financial instruments 1,212 1,034 2,246 3,428 2,630 6,058 Interest payable Miscellaneous financial liabilities 6,788 1,586 8,374 5,428 1,810 7,239 8,570 2,665 11,234 9,438 4,488 13,926

263 Consolidated Financial Statements Notes to the Consolidated Financial Statements 259 The negative fair values of derivatives relate to the following items: million Dec. 31, 2017 Dec. 31, 2016 Transactions for hedging foreign currency risk from assets using fair value hedges foreign currency risk from liabilities using fair value hedges interest rate risk using fair value hedges interest rate risk using cash flow hedges foreign currency and price risk from future cash flows (cash flow hedges) 542 4,135 Hedging transactions 706 4,652 Liabilities related to derivatives not included in hedging relationships 1,540 1,406 2,246 6,058 The negative fair value of transactions for hedging price risk from future cash flows (cash flow hedges) amounted to million (previous year: 21 million). Negative fair values of 22 million (previous year: 85 million) were recognized from transactions for hedging interest rate risk (fair value hedges) used in portfolio hedges. Further details on derivative financial instruments as a whole are given in the section entitled Financial risk management and financial instruments". 27. Noncurrent and current other liabilities CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Payments received on account of orders 4, ,779 4, ,614 Liabilities relating to other taxes 2, ,550 2, ,815 social security wages and salaries 4, ,785 4, ,245 Miscellaneous liabilities 4,071 4,375 8,446 3,777 4,103 7,880 15,961 6,199 22,160 15,461 5,664 21,125

264 260 Notes to the Consolidated Financial Statements Consolidated Financial Statements 28. Tax liabilities CARRYING AMOUNT CARRYING AMOUNT million Current Noncurrent Dec. 31, 2017 Current Noncurrent Dec. 31, 2016 Deferred tax liabilities 5,636 5,636 4,745 4,745 Provisions for taxes 1,397 3,030 4,427 1,301 3,556 4,857 Tax payables ,827 8,666 10,492 1,801 8,301 10, million (previous year: 328 million) of the deferred tax liabilities are due within one year. 29. Provisions for pensions and other post-employment benefits Provisions for pensions are recognized for commitments in the form of retirement, invalidity and dependents benefits payable under pension plans. The benefits provided by the Group vary according to the legal, tax and economic circumstances of the country concerned, and usually depend on the length of service and remuneration of the employees. Volkswagen Group companies provide occupational pensions under both defined contribution and defined benefit plans. In the case of defined contribution plans, the Company makes contributions to state or private pension schemes based on legal or contractual requirements, or on a voluntary basis. Once the contributions have been paid, there are no further obligations for the Volkswagen Group. Current contributions are recognized as pension expenses of the period concerned. In 2017, they amounted to a total of 2,214 million (previous year: 2,084 million) in the Volkswagen Group. Of this figure, contributions to the compulsory state pension system in Germany amounted to 1,634 million (previous year: 1,552 million). In the case of defined benefit plans, a distinction is made between pensions funded by provisions and externally funded plans. The pension provisions for defined benefits are measured by independent actuaries using the internationally accepted projected unit credit method in accordance with IAS 19, under which the future obligations are measured on the basis of the ratable benefit entitlements earned as of the balance sheet date. Measurement reflects actuarial assumptions as to discount rates, salary and pension trends, employee turnover rates, longevity and increases in healthcare costs, which were determined for each Group company depending on the economic environment. Remeasurements arise from differences between what has actually occurred and the prior-year assumptions as well as from changes in assumptions. They are recognized in other comprehensive income, net of deferred taxes, in the period in which they arise.

265 Consolidated Financial Statements Notes to the Consolidated Financial Statements 261 Multi-employer pension plans exist in the Volkswagen Group in the United Kingdom, Switzerland, Sweden and the Netherlands. These plans are defined benefit plans. A small proportion of them are accounted for as defined contribution plans, as the Volkswagen Group is not authorized to receive the information required in order to account for them as defined benefit plans. Under the terms of the multi-employer plans, the Volkswagen Group is not liable for the obligations of the other employers. In the event of its withdrawal from the plans or their winding-up, the proportionate share of the surplus of assets attributable to the Volkswagen Group will be credited or the proportionate share of the deficit attributable to the Volkswagen Group will have to be funded. In the case of the defined benefit plans accounted for as defined contribution plans, the Volkswagen Group s share of the obligations represents a small proportion of the total obligations. No probable significant risks arising from multi-employer defined benefit pension plans that are accounted for as defined contribution plans have been identified. The expected contributions to those plans will amount to 25 million for fiscal year Owing to their benefit character, the obligations of the US Group companies in respect of post-employment medical care in particular are also carried under provisions for pensions and other post-employment benefits. These post-employment benefit provisions take into account the expected long-term rise in the cost of healthcare. In fiscal year 2017, 17 million (previous year: 19 million) was recognized as an expense for health care costs. The related carrying amount as of December 31, 2017 was 210 million (previous year: 232 million). The following amounts were recognized in the balance sheet for defined benefit plans: million Dec. 31, 2017 Dec. 31, 2016 Present value of funded obligations 15,605 15,104 Fair value of plan assets 11,192 10,749 Funded status (net) 4,413 4,355 Present value of unfunded obligations 28,224 28,585 Amount not recognized as an asset because of the ceiling in IAS Net liability recognized in the balance sheet 32,666 32,967 of which provisions for pensions 32,730 33,012 of which other assets SIGNIFICANT PENSION ARRANGEMENTS IN THE VOLKSWAGEN GROUP For the period after their active working life, the Volkswagen Group offers its employees benefits under attractive, modern occupational pension arrangements. Most of the arrangements in the Volkswagen Group are pension plans for employees in Germany classified as defined benefit plans under IAS 19. The majority of these obligations are funded solely by recognized provisions. These plans are now largely closed to new members. To reduce the risks associated with defined benefit plans, in particular longevity, salary increases and inflation, the Volkswagen Group has introduced new defined benefit plans in recent years whose benefits are funded by appropriate external plan assets. The above-mentioned risks have been largely reduced in these pension plans. The proportion of the total defined benefit obligation attributable to pension obligations funded by plan assets will continue to rise in the future. The significant pension plans are described in the following. German pension plans funded solely by recognized provisions The pension plans funded solely by recognized provisions comprise both contribution-based plans with guarantees and final salary plans. For contribution-based plans, an annual pension expense dependent on income and status is converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlements). The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. For final salary plans, the underlying salary is multiplied at retirement by a percentage that depends on the years of service up until the retirement date.

266 262 Notes to the Consolidated Financial Statements Consolidated Financial Statements The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. The pension system provides for lifelong pension payments. The companies bear the longevity risk in this respect. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables the Heubeck 2005 G mortality tables which already reflect future increases in life expectancy. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law. German pension plans funded by external plan assets The pension plans funded by external plan assets are contribution-based plans with guarantees. In this case, an annual pension expense dependent on income and status is either converted into a lifelong pension entitlement using annuity factors (guaranteed modular pension entitlement) or paid out in a single lump sum or in installments. In some cases, employees also have the opportunity to provide for their own retirement through deferred compensation. The annuity factors include a guaranteed rate of interest. At retirement, the modular pension entitlements earned annually are added together. The pension expense is contributed on an ongoing basis to a separate pool of assets that is administered independently of the Company in trust and invested in the capital markets. If the plan assets exceed the present value of the obligations calculated using the guaranteed rate of interest, surpluses are allocated (modular pension bonuses). Since the assets administered in trust meet the IAS 19 criteria for classification as plan assets, they are deducted from the obligations. The amount of the pension assets is exposed to general market risk. The investment strategy and its implementation are therefore continuously monitored by the trusts governing bodies, on which the companies are also represented. For example, investment policies are stipulated in investment guidelines with the aim of limiting market risk and its impact on plan assets. In addition, asset-liability management studies are conducted if required so as to ensure that investments are in line with the obligations that need to be covered. The pension assets are currently invested primarily in fixed-income or equity funds. The main risks are therefore interest rate and equity price risk. To mitigate market risk, the pension system also provides for cash funds to be set aside in an equalization reserve before any surplus is allocated. The present value of the obligation is the present value of the guaranteed obligation after deducting the plan assets. If the plan assets fall below the present value of the guaranteed obligation, a provision must be recognized in that amount. The present value of the guaranteed obligation rises as interest rates fall and is therefore exposed to interest rate risk. In the case of lifelong pension payments, the Volkswagen Group bears the longevity risk. This is accounted for by calculating the annuity factors and the present value of the guaranteed obligation using the latest generational mortality tables the Heubeck 2005 G mortality tables which already reflect future increases in life expectancy. In addition, the independent actuaries carry out annual risk monitoring as part of the review of the assets administered by the trusts. To reduce the inflation risk from adjusting the regular pension payments by the rate of inflation, a pension adjustment that is not indexed to inflation was introduced for pension plans where this is permitted by law.

267 Consolidated Financial Statements Notes to the Consolidated Financial Statements 263 Calculation of the pension provisions was based on the following actuarial assumptions: GERMANY ABROAD % Discount rate at December Payroll trend Pension trend Employee turnover rate Annual increase in healthcare costs These assumptions are averages that were weighted using the present value of the defined benefit obligation. With regard to life expectancy, consideration is given to the latest mortality tables in each country. The discount rates are generally defined to reflect the yields on prime-rated corporate bonds with matching maturities and currencies. The iboxx AA 10+ Corporates index was taken as the basis for the obligations of German Group companies. Similar indices were used for foreign pension obligations. The payroll trends cover expected wage and salary trends, which also include increases attributable to career development. The pension trends either reflect the contractually guaranteed pension adjustments or are based on the rules on pension adjustments in force in each country. The employee turnover rates are based on past experience and future expectations. The following table shows changes in the net defined benefit liability recognized in the balance sheet: million Net liability recognized in the balance sheet at January 1 32,967 27,464 Current service cost 1,372 1,066 Net interest expense Actuarial gains ( )/losses (+) arising from changes in demographic assumptions Actuarial gains ( )/losses (+) arising from changes in financial assumptions 616 5,862 Actuarial gains ( )/losses (+) arising from experience adjustments Income/expenses from plan assets not included in interest income Change in amount not recognized as an asset because of the ceiling in IAS Employer contributions to plan assets Employee contributions to plan assets 8 7 Pension payments from company assets Past service cost (including plan curtailments) 7 24 Gains ( ) or losses (+) arising from plan settlements 1 4 Changes in consolidated Group 0 0 Other changes Foreign exchange differences from foreign plans Net liability recognized in the balance sheet at December 31 32,666 32,967

268 264 Notes to the Consolidated Financial Statements Consolidated Financial Statements The change in the amount not recognized as an asset because of the ceiling in IAS 19 contains an interest component, part of which was recognized in the financial result in profit or loss, and part of which was recognized outside profit or loss directly in equity. The change in the present value of the defined benefit obligation is attributable to the following factors: million Present value of obligations at January 1 43,689 37,215 Current service cost 1,372 1,066 Interest cost 883 1,075 Actuarial gains( )/losses (+) arising from changes in demographic assumptions Actuarial gains( )/losses (+) arising from changes in financial assumptions 616 5,862 Actuarial gains( )/losses (+) arising from experience adjustments Employee contributions to plan assets Pension payments from company assets Pension payments from plan assets Past service cost (including plan curtailments) 7 24 Gains ( ) or losses (+) arising from plan settlements 3 64 Changes in consolidated Group 0 0 Other changes 41 4 Foreign exchange differences from foreign plans Present value of obligations at December 31 43,829 43,689

269 Consolidated Financial Statements Notes to the Consolidated Financial Statements 265 Changes in the relevant actuarial assumptions would have had the following effects on the defined benefit obligation: DEC. 31, 2017 DEC. 31, 2016 Present value of defined benefit obligation if million Change in percent million Change in percent Discount rate Pension trend Payroll trend Longevity is 0.5 percentage points higher 39, , is 0.5 percentage points lower 48, , is 0.5 percentage points higher 46, , is 0.5 percentage points lower 41, , is 0.5 percentage points higher 44, , is 0.5 percentage points lower 43, , increases by one year 45, , The sensitivity analysis shown above considers the change in one assumption at a time, leaving the other assumptions unchanged versus the original calculation, i.e. any correlation effects between the individual assumptions are ignored. To examine the sensitivity of the defined benefit obligation to a change in assumed longevity, the estimates of mortality were reduced as part of a comparative calculation to the extent that doing so increases life expectancy by approximately one year. The average duration of the defined benefit obligation weighted by the present value of the defined benefit obligation (Macaulay duration) is 19 years (previous year: 20 years). The present value of the defined benefit obligation is attributable as follows to the members of the plan: million Active members with pension entitlements 26,067 25,622 Members with vested entitlements who have left the Company 2,233 2,222 Pensioners 15,530 15,846 43,829 43,689

270 266 Notes to the Consolidated Financial Statements Consolidated Financial Statements The maturity profile of payments attributable to the defined benefit obligation is presented in the following table, which classifies the present value of the obligation by the maturity of the underlying payments: million Payments due within the next fiscal year 1,151 1,126 Payments due between two and five years 4,994 4,801 Payments due in more than five years 37,685 37,762 43,829 43,689 Changes in plan assets are shown in the following table: million Fair value of plan assets at January 1 10,749 9,769 Interest income on plan assets determined using the discount rate Income/expenses from plan assets not included in interest income Employer contributions to plan assets Employee contributions to plan assets Pension payments from plan assets Gains (+) or losses ( ) arising from plan settlements 2 68 Changes in consolidated Group 1 Other changes 3 38 Foreign exchange differences from foreign plans Fair value of plan assets at December 31 11,192 10,749

271 Consolidated Financial Statements Notes to the Consolidated Financial Statements 267 The investment of the plan assets to cover future pension obligations resulted in income in the amount of 400 million (previous year: 695 million). Employer contributions to plan assets are expected to amount to 617 million (previous year: 594 million) in the next fiscal year. Plan assets are invested in the following asset classes: DEC. 31, 2017 DEC. 31, 2016 million Quoted prices in active markets No quoted prices in active markets Total Quoted prices in active markets No quoted prices in active markets Total Cash and cash equivalents Equity instruments Debt instruments 1, ,578 1, ,659 Direct investments in real estate Derivatives Equity funds 1, ,567 1, ,574 Bond funds 5, ,348 5, ,418 Real estate funds Other funds Other instruments % (previous year: 48.1%) of the plan assets are invested in German assets, 27.6% (previous year: 26.7%) in other European assets and 23.4 % (previous year: 25.2%) in assets in other regions. Plan assets include 15 million (previous year: 19 million) invested in Volkswagen Group assets and 18 million (previous year: 9 million) in Volkswagen Group debt instruments. The following amounts were recognized in the income statement: million Current service cost 1,372 1,066 Net interest on the net defined benefit liability Past service cost (including plan curtailments) 7 24 Gains ( ) or losses (+) arising from plan settlements 1 4 Net income ( ) and expenses (+) recognized in profit or loss 1,981 1,777 The above amounts are generally included in the personnel costs of the functions in the income statement. Net interest on the net defined benefit liability is reported in interest expenses.

272 268 Notes to the Consolidated Financial Statements Consolidated Financial Statements 30. Noncurrent and current other provisions million Obligations arising from sales Employee expenses Litigation and legal risks Miscellaneous provisions Total Balance at Jan. 1, ,326 4,148 8,409 7,075 50,958 Foreign exchange differences Changes in consolidated Group Utilized 9,265 1,344 1,583 2,103 14,295 Additions/New provisions 12,180 1,736 5,605 3,419 22,939 Unwinding of discount/effect of change in discount rate Reversals 1, ,199 Balance at Dec. 31, ,027 4,546 11,717 7,904 57,193 of which current 19,521 1,900 8,624 5,666 35,711 of which noncurrent 13,506 2,646 3,092 2,238 21,482 Balance at Jan. 1, ,027 4,546 11,717 7,904 57,193 Foreign exchange differences ,038 Changes in consolidated Group Utilized 17,546 1,450 7,444 2,334 28,774 Additions/New provisions 14,990 2,030 2,190 3,217 22,426 Unwinding of discount/effect of change in discount rate Reversals 1, ,540 Balance at Dec. 31, ,865 4,886 5,802 7,634 46,186 of which current 14,821 2,069 2,999 5,458 25,347 of which noncurrent 13,044 2,817 2,802 2,176 20,839 The obligations arising from sales contain provisions covering all risks relating to the sale of vehicles, components and genuine parts through to the disposal of end-of-life vehicles. They primarily comprise warranty obligations, calculated on the basis of losses to date and estimated future losses. They also include provisions for discounts, bonuses and similar allowances which are incurred after the balance sheet date, but for which there is a legal or constructive obligation attributable to sales revenue before the balance sheet date. Provisions for employee expenses are recognized for long-service awards, time credits, partial retirement arrangements, severance payments and similar obligations, among other things. The decline in provisions for obligations arising from sales and for litigation and legal risks result primarily from the utilization of the provisions recognized in connection with the diesel issue. In addition to residual provisions relating to the diesel issue, the provisions for litigation and legal risks contain amounts related to a large number of legal disputes and official proceedings in which Volkswagen Group companies become involved in Germany and internationally in the course of their operating activities. In particular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. Please refer to the Litigation section for a discussion of the legal risks.

273 Consolidated Financial Statements Notes to the Consolidated Financial Statements 269 Miscellaneous provisions relate to a wide range of identifiable specific risks, price risks and uncertain obligations, which are measured in the amount of the expected settlement value. Miscellaneous provisions additionally include provisions amounting to 534 million (previous year: 490 million) relating to the insurance business. 31. Put options and compensation rights granted to noncontrolling interest share-holders This balance sheet item consists primarily of the present value of the cash settlement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act) offered to MAN shareholders in connection with the control and profit and loss transfer agreement, including the basic interest rate in accordance with section 247 of the Bürgerliches Gesetzbuch (BGB German Civil Code) assumed until the end of the award proceedings. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH, a subsidiary of Volkswagen AG, in June The agreement sets out that the noncontrolling interest shareholders of MAN SE are entitled to either a cash settlement in accordance with section 305 of the AktG amounting to per tendered ordinary or preferred share, or cash compensation in accordance with section 304 of the AktG in the amount of 3.07 per ordinary or preferred share (after corporate taxes, before the shareholder s individual tax liability) for each full fiscal year. In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest shareholders of MAN should be increased from to 90.29; at the same time, the amount of the cash compensation was confirmed. The ruling is not yet legally effective, and both parties to the proceedings have since appealed. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms and by the court-appointed auditor of the agreement. As a precaution, the measurement was adjusted in 2015 to the higher settlement payable. 32. Trade payables million Dec. 31, 2017 Dec. 31, 2016 Trade payables to third parties 22,661 22,311 unconsolidated subsidiaries joint ventures associates other investees and investors ,046 22,794

274 270 Notes to the Consolidated Financial Statements Consolidated Financial Statements Additional balance sheet disclosures in accordance with IFRS 7 (Financial Instruments) CARRYING AMOUNT OF FINANCIAL INSTRUMENTS BY IAS 39 MEASUREMENT CATEGORY million Dec. 31, 2017 Dec. 31, 2016 Financial assets at fair value through profit or loss 1, Loans and receivables¹ 125, ,376 Available-for-sale financial assets 16,182 17,707 Financial liabilities at fair value through profit or loss 1,540 2,358 Financial liabilities measured at amortized cost 198, ,791 1 Prior-year figures adjusted. Further details can be found in the disclosures in the section entitled Noncurrent and current financial services receivables. RECONCILIATION OF BALANCE SHEET ITEMS TO CLASSES OF FINANCIAL INSTRUMENTS The following table shows the reconciliation of the balance sheet items to the relevant classes of financial instruments, broken down by the carrying amount and fair value of the financial instruments. The fair value of financial instruments measured at amortized cost, such as receivables and liabilities, is calculated by discounting using a market rate of interest for a similar risk and matching maturity. For reasons of materiality, the fair value of current balance sheet items is generally deemed to be their carrying amount. Financial instruments measured at fair value also include shares in partnerships and corporations. There is no active market for these instruments. Since the future cash flows cannot be reliably determined, fair value cannot be determined using measurement models. The shares in these companies are carried at cost.

275 Consolidated Financial Statements Notes to the Consolidated Financial Statements 271 RECONCILIATION OF BALANCE SHEET ITEMS TO CLASSES OF FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 2016 DERIVATIVE MEASURED AT FAIR VALUE MEASURED AT AMORTIZED COST FINANCIAL INSTRUMENTS WITHIN HEDGE ACCOUNTING NOT WITHIN SCOPE OF IFRS 7 BALANCE SHEET ITEM AT DEC. 31, 2016 million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments 8,616 8,616 Other equity investments Financial services receivables 68,402 70,766 68,402 Other financial assets 251 4,982 5,008 3,023 8,256 Current assets Trade receivables 12,187 12,187 12,187 Financial services receivables 49,673 49,673 49,673 Other financial assets 740 9,527 9,527 1,577 11,844 Marketable securities 17,520 17,520 Cash, cash equivalents and time deposits 19,265 19,265 19,265 Noncurrent liabilities Noncurrent financial liabilities 66,358 66,932 66,358 Other noncurrent financial liabilities 885 1,859 1,863 1,745 4,488 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders 3,849 3,861 3,849 Current financial liabilities 88,461 88,461 88,461 Trade payables 22,794 22,794 22,794 Other current financial liabilities 1,473 6,010 6,010 1,956 9,438

276 272 Notes to the Consolidated Financial Statements Consolidated Financial Statements RECONCILIATION OF BALANCE SHEET ITEMS TO CLASSES OF FINANCIAL INSTRUMENTS AS OF DECEMBER 31, 2017 DERIVATIVE MEASURED AT FAIR VALUE MEASURED AT AMORTIZED COST FINANCIAL INSTRUMENTS WITHIN HEDGE ACCOUNTING NOT WITHIN SCOPE OF IFRS 7 BALANCE SHEET ITEM AT DEC. 31, 2017 million Carrying amount Carrying amount Fair value Carrying amount Carrying amount Noncurrent assets Equity-accounted investments 8,205 8,205 Other equity investments 243 1,075 1,318 Financial services receivables 73,249 75,049 73,249 Other financial assets 776 4,364 4,391 3,315 8,455 Current assets Trade receivables 13,357 13,357 13,357 Financial services receivables 53,145 53,145 53,145 Other financial assets 936 9,153 9,153 1,909 11,998 Marketable securities 15,939 15,939 Cash, cash equivalents and time deposits 18,457 18,457 18,457 Assets held for sale Noncurrent liabilities Noncurrent financial liabilities 81,628 82,567 81,628 Other noncurrent financial liabilities 774 1,630 1, ,665 Current liabilities Put options and compensation rights granted to noncontrolling interest shareholders 3,795 3,811 3,795 Current financial liabilities 81,844 81,844 81,844 Trade payables 23,046 23,046 23,046 Other current financial liabilities 766 7,358 7, ,570 Uniform valuation techniques and inputs are used to measure fair value. The fair value of Level 2 and 3 financial instruments is measured in the individual divisions on the basis of Group-wide specifications. The measurement techniques used are explained in the section on Accounting policies. The fair value of put options and compensation rights granted to noncontrolling interest shareholders is calculated using a present value model based on the cash settlement determined by the Munich Regional Court in the award proceedings, including cash compensation, as well as the minimum statutory interest rate and a risk-adjusted discount rate for a matching maturity. For further information, please see section entitled "Put options and compensation rights granted to noncontrolling interest shareholders. The fair value of Level 3 receivables was measured by reference to individual expectations of losses; these are based to a significant extent on the Company s assumptions about counterparty credit quality. Financial services receivables are allocated to Level 3 because their fair value was measured using inputs that are not observable in an active market.

277 Consolidated Financial Statements Notes to the Consolidated Financial Statements 273 The following table contains an overview of the financial assets and liabilities measured at fair value by level: FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE BY LEVEL million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments Other financial assets Current assets Other financial assets Marketable securities 17,520 17,520 Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities 1,473 1, million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other equity investments Other financial assets Current assets Other financial assets Marketable securities 15,939 15,939 Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities

278 274 Notes to the Consolidated Financial Statements Consolidated Financial Statements FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES MEASURED AT AMORTIZED COST BY LEVEL million Dec. 31, 2016 Level 1 Level 2 Level 3 Fair value of financial assets measured at amortized cost Financial services receivables 120, ,438 Trade receivables 12,187 11, Other financial assets 14, ,695 7,289 Cash, cash equivalents and time deposits 19,265 18, Fair value of financial assets measured at amortized cost 166,425 19,389 19, ,937 Fair value of financial liabilities measured at amortized cost Put options and compensation rights granted to noncontrolling interest shareholders 3,861 3,861 Trade payables 22,794 22,794 Financial liabilities 155,394 39, ,198 1,804 Other financial liabilities 7, , Fair value of financial liabilities measured at amortized cost 189,921 39, ,151 5,842 million Dec. 31, 2017 Level 1 Level 2 Level 3 Fair value of financial assets measured at amortized cost Financial services receivables 128, ,195 Trade receivables 13,357 13, Other financial assets 13, ,925 7,449 Cash, cash equivalents and time deposits 18,457 18, Fair value of financial assets measured at amortized cost 173,553 18,213 19, ,817 Fair value of financial liabilities measured at amortized cost Put options and compensation rights granted to noncontrolling interest shareholders 3,811 3,811 Trade payables 23,046 23,046 Financial liabilities 164,411 50, ,606 1,835 Other financial liabilities 8, , Fair value of financial liabilities measured at amortized cost 200,259 51, ,836 5,857

279 Consolidated Financial Statements Notes to the Consolidated Financial Statements 275 DERIVATIVE FINANCIAL INSTRUMENTS WITHIN HEDGE ACCOUNTING BY LEVEL million Dec. 31, 2016 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,023 3,019 4 Current assets Other financial assets 1,577 1,577 Noncurrent liabilities Other noncurrent financial liabilities 1,745 1,745 0 Current liabilities Other current financial liabilities 1,956 1,956 million Dec. 31, 2017 Level 1 Level 2 Level 3 Noncurrent assets Other financial assets 3,315 3,315 Current assets Other financial assets 1,909 1,909 Noncurrent liabilities Other noncurrent financial liabilities Current liabilities Other current financial liabilities The allocation of fair values to the three levels in the fair value hierarchy is based on the availability of observable market prices. Level 1 is used to report the fair value of financial instruments for which a price is directly available in an active market. Examples include marketable securities and other equity investments measured at fair value. Fair values in Level 2, for example of derivatives, are measured on the basis of observable market inputs using market-based valuation techniques. In particular, the inputs used include exchange rates, yield curves and commodity prices that are observable in the relevant markets and obtained through pricing services. Level 3 fair values are calculated using valuation techniques that incorporate inputs that are not observable in active markets. In the Volkswagen Group, long-term commodity futures are allocated to Level 3 because the prices available on the market must be extrapolated for measurement purposes. This is done on the basis of observable inputs obtained for the different commodities through pricing services. Options on equity instruments and residual value protection models are also reported in Level 3. Equity instruments are measured primarily using the relevant business plans and entity-specific discount rates. The significant inputs used to measure fair value for the residual value protection models include forecasts and estimates of used vehicle residual values for the appropriate models.

280 276 Notes to the Consolidated Financial Statements Consolidated Financial Statements CHANGES IN BALANCE SHEET ITEMS MEASURED AT FAIR VALUE BASED ON LEVEL 3 million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, Foreign exchange differences 0 0 Total comprehensive income recognized in profit or loss recognized in other comprehensive income 7 3 Additions (purchases) 23 Sales and settlements 9 89 Transfers into Level Balance at Dec. 31, Total gains or losses recognized in profit or loss Net other operating expense/income of which attributable to assets/liabilities held at the reporting date Financial result of which attributable to assets/liabilities held at the reporting date million Financial assets measured at fair value Financial liabilities measured at fair value Balance at Jan. 1, Foreign exchange differences 9 1 Total comprehensive income recognized in profit or loss recognized in other comprehensive income 4 0 Additions (purchases) Sales and settlements Transfers into Level Balance at Dec. 31, Total gains or losses recognized in profit or loss Net other operating expense/income of which attributable to assets/liabilities held at the reporting date Financial result of which attributable to assets/liabilities held at the reporting date

281 Consolidated Financial Statements Notes to the Consolidated Financial Statements 277 The transfers between the levels of the fair value hierarchy are reported at the respective reporting dates. The transfers out of Level 3 into Level 2 comprise commodity futures for which observable quoted prices are now available for measurement purposes due to the decline in their remaining maturities; consequently, no extrapolation is required. There were no transfers between other levels of the fair value hierarchy. Commodity prices are the key risk variable for the fair value of commodity futures. Sensitivity analyses are used to present the effect of changes in commodity prices on earnings after tax and equity. If commodity prices for commodity futures classified as Level 3 had been 10% higher (lower) as of December 31, 2017, earnings after tax would have been 10 million (previous year: 6 million) higher (lower) and equity would have been million (previous year: 3 million) higher (lower). The key risk variable for measuring options on equity instruments held by the Company is the relevant enterprise value. Sensitivity analyses are used to present the effect of changes in risk variables on earnings after tax. If the assumed enterprise values had been 10% higher, earnings after tax would have been 3 million (previous year: 1 million) higher. If the assumed enterprise values had been 10% lower, earnings after tax would have been 3 million (previous year: 1 million) lower. Residual value risks result from hedging agreements with dealers under which earnings effects caused by market-related fluctuations in residual values that arise from buy-back obligations under leases are borne in part by the Volkswagen Group. The key risk variable influencing the fair value of the options relating to residual value risks is used car prices. Sensitivity analyses are used to quantify the effects of changes in used car prices on earnings after tax. If the prices for the used cars covered by the residual value protection model had been 10% higher as of December 31, 2017, earnings after tax would have been 319 million (previous year: 249 million) higher. If the prices for the used cars covered by the residual value protection model had been 10% lower as of December 31, 2017, earnings after tax would have been 333 million (previous year: 249 million) lower.

282 278 Notes to the Consolidated Financial Statements Consolidated Financial Statements OFFSETTING OF FINANCIAL ASSETS AND LIABILITIES The following tables contain information about the effects of offsetting in the balance sheet and the potential financial effects of offsetting in the case of instruments that are subject to a legally enforceable master netting arrangement or a similar agreement. AMOUNTS THAT ARE NOT SET OFF IN THE BALANCE SHEET million Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial instruments Collateral received Net amount at Dec. 31, 2016 Derivatives 5,591 5,591 3, ,990 Financial services receivables 118, , ,010 Trade receivables 12, , ,179 Marketable securities 17,520 17,520 17,520 Cash, cash equivalents and time deposits 19,265 19,265 19,265 Other financial assets 14, , ,695 AMOUNTS THAT ARE NOT SET OFF IN THE BALANCE SHEET million Gross amounts of recognized financial assets Gross amounts of recognized financial liabilities set off in the balance sheet Net amounts of financial assets presented in the balance sheet Financial instruments Collateral received Net amount at Dec. 31, 2017 Derivatives 6, ,936 1, ,704 Financial services receivables 126, , ,328 Trade receivables 13, , ,355 Marketable securities 15,939 15,939 15,939 Cash, cash equivalents and time deposits 18,457 18,457 18,457 Other financial assets 13, ,760 13,760

283 Consolidated Financial Statements Notes to the Consolidated Financial Statements 279 AMOUNTS THAT ARE NOT SET OFF IN THE BALANCE SHEET million Gross amounts of recognized financial liabilities Gross amounts of recognized financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial instruments Collateral pledged Net amount at Dec. 31, 2016 Put options and compensation rights granted to noncontrolling interest shareholders 3,849 3,849 3,849 Derivatives 6,058 6,058 3, ,607 Financial liabilities 154, ,819 3, ,778 Trade payables 22, , ,794 Other financial liabilities 8, ,869 7,869 AMOUNTS THAT ARE NOT SET OFF IN THE BALANCE SHEET million Gross amounts of recognized financial liabilities Gross amounts of recognized financial assets set off in the balance sheet Net amounts of financial liabilities presented in the balance sheet Financial instruments Collateral pledged Net amount at Dec. 31, 2017 Put options and compensation rights granted to noncontrolling interest shareholders 3,795 3,795 3,795 Derivatives 2, , ,330 Financial liabilities 163, ,472 2, ,677 Trade payables 23, , ,045 Other financial liabilities 9, ,988 8,988 The Financial instruments column shows the amounts that are subject to a master netting arrangement but were not set off because they do not meet the criteria for offsetting in the balance sheet. The Collateral received and Collateral pledged columns show the amounts of cash collateral and collateral in the form of financial instruments received and pledged for the total assets and liabilities that do not meet the criteria for offsetting in the balance sheet.

284 280 Notes to the Consolidated Financial Statements Consolidated Financial Statements CHANGES IN CREDIT RISK VALUATION ALLOWANCES ON FINANCIAL ASSETS million Specific valuation allowances Portfolio-based valuation allowances 2017 Specific valuation allowances Portfolio-based valuation allowances 2016 Balance at Jan. 1 2,092 2,175 4,268 2,142 1,970 4,112 Exchange rate and other changes Changes in consolidated Group Additions , ,390 Utilization Reversals , Reclassification Balance at Dec. 31 2,094 1,959 4,054 2,092 2,175 4,268 The valuation allowances mainly relate to the credit risks associated with receivables from the financial services business. ASSET-BACKED SECURITIES TRANSACTIONS Asset-backed securities transactions with financial assets amounting to 24,561 million (previous year: 24,191 million) entered into to refinance the financial services business are included in bonds, commercial paper and notes, and liabilities from loans. The corresponding carrying amount of the receivables from the customer and dealer financing and the finance lease business amounted to 26,689 million (previous year: 26,184 million). Collateral of 41,799 million (previous year: 43,847 million) in total was furnished as part of asset-backed securities transactions. The expected payments were assigned to structured entities and the equitable liens in the financed vehicles were transferred. These asset-backed securities transactions did not result in the receivables from financial services business being derecognized, as the Group retains nonpayment and late payment risks. The difference between the assigned receivables and the related liabilities is the result of different terms and conditions and the share of the securitized paper and notes held by the Volkswagen Group itself, as well as the proportion of vehicles financed within the Group. Most of the public and private asset-backed securities transactions of the Volkswagen Group can be repaid in advance (clean-up call) if less than 9% or 10%, as appropriate, of the original transaction volume is outstanding. The assigned receivables cannot be assigned again or pledged elsewhere as collateral. The claims of the holders of commercial paper and notes are limited to the assigned receivables and the receipts from those receivables are earmarked for the repayment of the corresponding liability. As of December 31, 2017, the fair value of the assigned receivables still recognized in the balance sheet was 27,089 million (previous year: 27,856 million). The fair value of the related liabilities was 24,511 million (previous year: 24,424 million) at that reporting date. Companies of the Volkswagen Financial Services subgroup are contractually obliged, under certain conditions, to transfer funds to the structured entities that are included in its financial statements. Since the receivables are transferred to the special purpose entity by way of undisclosed assignment, the situation may occur in which the receivable has already been reduced in a legally binding manner at the originator, for example if the obligor effectively offsets it against receivables owed to it by a company belonging to the Volkswagen Group. In this case, collateral must be furnished for the resulting compensation claims against the special purpose entity, for example if the rating of the Group company concerned declines to a contractually agreed reference value.

285 Consolidated Financial Statements Notes to the Consolidated Financial Statements 281 Other disclosures 33. Cash flow statement Cash flows are presented in the cash flow statement classified into cash flows from operating activities, investing activities and financing activities, irrespective of the balance sheet classification. Cash flows from operating activities are derived indirectly from earnings before tax. Earnings before tax are adjusted to eliminate noncash expenditures (mainly depreciation, amortization and impairment losses) and income. Other noncash income and expense results mainly from measurement effects in connection with financial instruments and to fair value changes relating to hedging transactions (see section entitled Other financial result ). This results in cash flows from operating activities after accounting for changes in working capital, which also include changes in lease assets and in financial services receivables. Investing activities include additions to property, plant and equipment and equity investments, additions to capitalized development costs and investments in securities, loans and time deposits. Financing activities include outflows of funds from dividend payments and redemption of bonds, inflows from the capital increases and issuance of bonds, and changes in other financial liabilities. Please refer to the Equity section for information on the inflows from the issuance of hybrid capital in June 2017 in the amount of 3,473 million contained in the capital contributions. The changes in balance sheet items that are presented in the cash flow statement cannot be derived directly from the balance sheet, as the effects of currency translation and changes in the consolidated Group are noncash transactions and are therefore eliminated. In 2017, cash flows from operating activities include interest received amounting to 6,641 million (previous year: 6,364 million) and interest paid amounting to 2,332 million (previous year: 2,716 million). Cash flows from operating activities also include dividend payments received from joint ventures and associates of 3,653 million (previous year: 3,613 million). Dividends amounting to 1,015 million (previous year: 68 million) were paid to Volkswagen AG shareholders. million Dec. 31, 2017 Dec. 31, 2016 Cash, cash equivalents and time deposits as reported in the balance sheet 18,457 19,265 Time deposits Cash and cash equivalents as reported in the cash flow statement 18,038 18,833 Time deposits are not classified as cash equivalents. Time deposits have a contractual maturity of more than three months. The maximum default risk corresponds to its carrying amount.

286 282 Notes to the Consolidated Financial Statements Consolidated Financial Statements The following table shows the classification of changes in financial liabilities into cash and non-cash transactions: NON-CASH CHANGES million Jan. 1, 2017 Cash-effective changes Foreign exchange differences Changes in consolidated group Changes in fair values Dec. 31, 2017 Bonds 52,022 12,402 1, ,118 Other total third-party borrowings 102,259 3,501 5, ,875 Finance lease liabilities Total third-party borrowings 154,819 15,875 6, ,472 Put options and compensation rights granted to noncontrolling interest shareholders 3, ,795 Other financial assets and liabilities Financial assets and liabilities in financing activities 158,755 15,483 6, , Financial risk management and financial instruments 1. HEDGING GUIDELINES AND FINANCIAL RISK MANAGEMENT PRINCIPLES The principles and responsibilities for managing and controlling the risks that could arise from financial instruments are defined by the Board of Management and monitored by the Supervisory Board. General rules apply to the Group-wide risk policy; these are oriented on the statutory requirements and the Minimum Requirements for Risk Management by Credit Institutions. Group Treasury is responsible for operational risk management and control of risks from financial instruments. The main functions of the MAN and PHS subgroups are included in Group Treasury s operational risk management and control for risks relating to financial instruments, while the Scania subgroup is only included to a limited extent. Subgroups have their own risk management structures. The Risk Management Group Executive Committee is regularly informed about current financial risks. In addition, the Group Board of Management and the Supervisory Board are regularly updated on the current risk situation. For more information, please see the management report on page CREDIT AND DEFAULT RISK The credit and default risk arising from financial assets involves the risk of default by counterparties, and therefore comprises at a maximum the amount of the claims under carrying amounts receivable from them and the irrevocable credit commitments. The maximum potential credit and default risk is reduced by collateral held and other credit enhancements in the amount of 78,934 million (previous year: 77,465 million). Collateral is held exclusively for financial assets in the measured at amortized cost category. It relates primarily to collateral for financial services receivables and trade receivables. Collateral comprises vehicles and assets transferred as security, as well as guarantees and real property liens. Cash collateral is also used in hedging transactions. The risk arising from nonderivative financial instruments is also accounted for by recognizing bad debt losses. Significant cash and capital investments, as well as derivatives, are only entered into with national and international banks. Risk is additionally limited by a limit system based primarily on the equity base of the counterparties concerned and on credit assessments by international rating agencies. Financial guarantees issued also give rise to credit and default risk. The maximum potential credit and default risk is calculated from the amount Volkswagen would have to pay if claims were to be asserted under the guarantees. The corresponding amounts are presented in the Liquidity risk section.

287 Consolidated Financial Statements Notes to the Consolidated Financial Statements 283 There were no material concentrations of risk at individual counterparties or counterparty groups in the past fiscal year due to the global allocation of the Group s business activities and the resulting diversification. There was a slight change in the concentration of credit and default risk exposures to the German public banking sector as a whole that has arisen from Group-wide cash and capital investments as well as derivatives: the portion attributable to this sector was 7.4% at the end of 2017 compared with 13.0% at the end of Any existing concentration of risk is assessed and monitored both at the level of individual counterparties or counterparty groups and with regard to the countries in which these are based, in each case using the share of all credit and default risk exposures accounted for by the risk exposure concerned. For China, credit and default risk exposures accounted for 29.5% at the end of 2017, as against 27.9% at the end of There were no other concentrations of credit and default risk exposures in individual countries. CREDIT AND DEFAULT RISK RELATING TO FINANCIAL ASSETS BY GROSS CARRYING AMOUNT million Neither past due nor impaired Past due and not impaired Impaired Dec. 31, 2017 Neither past due nor impaired Past due and not impaired Impaired Dec. 31, 2016 Measured at amortized cost Financial services receivables 124,044 2,888 2, , ,747 3,001 3, ,751 Trade receivables 10,395 2, ,791 9,421 2, ,624 Other receivables 13, ,700 14, ,663 Measured at fair value 16, ,152 17, , ,704 5,822 3, , ,466 5,706 4, ,203 There are no past due financial instruments measured at fair value in the Volkswagen Group. In fiscal year 2017, marketable securities measured at fair value with a cost of 86 million (previous year: 83 million) were individually impaired. In addition, portfolio-based impairment losses are recognized in respect of the financial services receivables presented above that are not past due and not individually impaired, as well as of the financial services receivables presented above that are past due and not individually impaired. The assets in the class used for hedging are neither past due nor impaired.

288 284 Notes to the Consolidated Financial Statements Consolidated Financial Statements CREDIT RATING OF THE GROSS CARRYING AMOUNTS OF FINANCIAL ASSETS THAT ARE NEITHER PAST DUE NOR IMPAIRED million Risk class 1 Risk class 2 Dec. 31, 2017 Risk class 1 Risk class 2 Dec. 31, 2016 Measured at amortized cost Financial services receivables 104,143 19, ,044 99,153 16, ,747 Trade receivables 10, ,395 9, ,421 Other receivables 13, ,403 14, ,391 Measured at fair value 22,086 22,086 22,021 22, ,802 20, , ,694 16, ,580 The Volkswagen Group performs a credit assessment of borrowers in all loan and lease agreements, using scoring systems for the high-volume business and rating systems for corporate customers and receivables from dealer financing. Receivables rated as good are contained in risk class 1. Receivables from customers whose credit rating is not good but have not yet defaulted are contained in risk class 2. The financial assets measured at fair value include derivative financial instruments within hedge accounting in an amount of 5.2 billion (previous year: 4.1 billion); they are allocated to risk class 1. MATURITY ANALYSIS OF THE GROSS CARRYING AMOUNTS OF FINANCIAL ASSETS THAT ARE PAST DUE AND NOT IMPAIRED PAST DUE BY GROSS CARRYING AMOUNT million up to 30 days 30 to 90 days more than 90 days Dec. 31, 2016 Measured at amortized cost Financial services receivables 2, ,001 Trade receivables 1, ,596 Other receivables Measured at fair value 3,334 1, ,706

289 Consolidated Financial Statements Notes to the Consolidated Financial Statements 285 PAST DUE BY GROSS CARRYING AMOUNT million up to 30 days 30 to 90 days more than 90 days Dec. 31, 2017 Measured at amortized cost Financial services receivables 2, ,888 Trade receivables 1, ,833 Other receivables Measured at fair value 3,355 1,438 1,029 5,822 Collateral that was accepted for financial assets in the current fiscal year was recognized in the balance sheet in the amount of 109 million (previous year: 120 million). This mainly relates to vehicles. 3. LIQUIDITY RISK The solvency and liquidity of the Volkswagen Group are ensured at all times by rolling liquidity planning, a liquidity reserve in the form of cash, confirmed credit lines and the issuance of securities on the international money and capital markets. The volume of confirmed bilateral and syndicated credit lines stood at 19.9 billion as of December , of which 3.4 billion was drawn down. Local cash funds in certain countries (e.g. China, Brazil, Argentina, India and South Africa) are only available to the Group for cross-border transactions subject to exchange controls. There are no significant restrictions over and above these. The following overview shows the contractual undiscounted cash flows from financial instruments. MATURITY ANALYSIS OF UNDISCOUNTED CASH FLOWS FROM FINANCIAL INSTRUMENTS REMAINING CONTRACTUAL MATURITIES REMAINING CONTRACTUAL MATURITIES million under one year within one to five years over five years 2017 under one year within one to five years over five years 2016 Put options and compensation rights granted to noncontrolling interest shareholders 3,379 3,379 3,382 3,382 Financial liabilities 83,867 69,968 16, ,949 90,044 60,603 10, ,602 Trade payables 23, ,046 22, ,794 Other financial liabilities 7,360 1, ,003 6,009 1, ,880 Derivatives 72,635 47, ,381 77,294 59, , , ,945 16, , , ,405 11, ,079 When calculating cash outflows related to put options and compensation rights, it was assumed that shares would be tendered at the earliest possible repayment date.

290 286 Notes to the Consolidated Financial Statements Consolidated Financial Statements Derivatives comprise both cash flows from derivative financial instruments with negative fair values and cash flows from derivatives with positive fair values for which gross settlement has been agreed. Derivatives entered into through offsetting transactions are also accounted for as cash outflows. The cash outflows from derivatives for which gross settlement has been agreed are matched in part by cash inflows. These cash inflows are not reported in the maturity analysis. If these cash inflows were also recognized, the cash outflows presented would be substantially lower. This applies in particular also if hedges have been closed with offsetting transactions. The cash outflows from irrevocable credit commitments are presented in section entitled "Other financial obligations, classified by contractual maturities. As of December 31, 2017, the maximum potential liability under financial guarantees amounted to 261 million (previous year: 173 million). Financial guarantees are assumed to be due immediately in all cases. 4. MARKET RISK 4.1 Hedging policy and financial derivatives During the course of its general business activities, the Volkswagen Group is exposed to foreign currency, interest rate, commodity price, equity price and fund price risk. Corporate policy is to limit or eliminate such risk by means of hedging. All necessary hedging transactions with the exception of the Scania, MAN and Porsche Holding GmbH (Salzburg) subgroups are executed or coordinated centrally by Group Treasury. The following table shows the gains and losses on hedges: million Hedging instruments used in fair value hedges Hedged items used in fair value hedges Ineffective portion of cash flow hedges 11 6 The ineffective portion of cash flow hedges represents the income and expenses from changes in the fair value of hedging instruments that exceed the changes in the fair value of the hedged items but that are documented to be within the permitted range of 80% to 125% overall when measuring effectiveness. Such income or expenses are recognized directly in the financial result. During the fiscal year, 554 million increasing earnings (previous year: 1,222 million reducing earnings) was transferred from the cash flow hedge reserve to the other operating result, 11 million increasing earnings (previous year: 10 million reducing earnings), was transferred to the financial result, and 7 million (previous year: 90 million), both reducing earnings, was transferred to cost of sales and the financial result.

291 Consolidated Financial Statements Notes to the Consolidated Financial Statements 287 The Volkswagen Group uses two different methods to present market risk from nonderivative and derivative financial instruments in accordance with IFRS 7. For quantitative risk measurement, interest rate and foreign currency risk in the Volkswagen Financial Services subgroup are measured using a value-at-risk (VaR) model on the basis of a historical simulation, while market risk in the other Group companies is determined using a sensitivity analysis. The value-at-risk calculation indicates the size of the maximum potential loss on the portfolio as a whole within a time horizon of 40 days, measured at a confidence level of 99%. To provide the basis for this calculation, all cash flows from nonderivative and derivative financial instruments are aggregated into an interest rate gap analysis. The historical market data used in calculating value at risk covers a period of 1,000 trading days. The sensitivity analysis calculates the effect on equity and profit or loss by modifying risk variables within the respective market risks. 4.2 Market risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) Foreign currency risk Foreign currency risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) is attributable to investments, financing measures and operating activities. Currency forwards, currency options, currency swaps and cross-currency swaps are used to limit foreign currency risk. These transactions relate to the exchange rate hedging of all material payments covering general business activities that are not made in the functional currency of the respective Group companies. The principle of matching currencies applies to the Group s financing activities. Hedging transactions entered into in 2017 as part of foreign currency risk management were amongst others in Argentine pesos, Australian dollars, Brazilian real, sterling, Chinese renminbi, Hong Kong dollars, Indian rupees, Japanese yen, Canadian dollars, Mexican pesos, Norwegian kroner, Polish zloty, Russian rubles, Swedish kronor, Swiss francs, Singapore dollars, South African rand, South Korean won, Taiwan dollars, Czech koruna, Hungarian forints and US dollars. All nonfunctional currencies in which the Volkswagen Group enters into financial instruments are included as relevant risk variables in the sensitivity analysis in accordance with IFRS 7. If the functional currencies concerned had appreciated or depreciated by 10% against the other currencies, the exchange rates shown below would have resulted in the following effects on the hedging reserve in equity and on earnings after tax. It is not appropriate to add together the individual figures, since the results of the various functional currencies concerned are based on different scenarios.

292 288 Notes to the Consolidated Financial Statements Consolidated Financial Statements The following table shows the sensitivities of the main currencies in the portfolio as of December 31, DEC. 31, 2017 DEC. 31, 2016 million +10% 10% +10% 10% Exchange rate EUR/USD Hedging reserve 1,627 1,303 1,929 2,294 Profit/loss after tax EUR/GBP Hedging reserve 1,126 1,124 1,202 1,189 Profit/loss after tax EUR/CNY Hedging reserve Profit/loss after tax EUR/JPY Hedging reserve Profit/loss after tax EUR/CHF Hedging reserve Profit/loss after tax EUR/AUD Hedging reserve Profit/loss after tax EUR/CAD Hedging reserve Profit/loss after tax EUR/SEK Hedging reserve Profit/loss after tax CZK/GBP Hedging reserve Profit/loss after tax EUR/CZK Hedging reserve Profit/loss after tax EUR/TWD Hedging reserve Profit/loss after tax GBP/USD Hedging reserve Profit/loss after tax EUR/KRW Hedging reserve Profit/loss after tax EUR/PLN Hedging reserve Profit/loss after tax PLN/CZK Hedging reserve Profit/loss after tax BRL/USD Hedging reserve Profit/loss after tax

293 Consolidated Financial Statements Notes to the Consolidated Financial Statements Interest rate risk Interest rate risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) results from changes in market interest rates, primarily for medium- and long-term variable interest receivables and liabilities. Interest rate swaps and cross-currency interest rate swaps are entered into to hedge against this risk primarily under fair value or cash flow hedges, and depending on market conditions. Intragroup financing arrangements are mainly structured to match the maturities of their refinancing. Departures from the Group standard are subject to centrally defined limits and monitored on an ongoing basis. Interest rate risk within the meaning of IFRS 7 is calculated for these companies using sensitivity analyses. The effects of the risk-variable market rates of interest on the financial result and on equity are presented, net of tax. If market interest rates had been 100 bps higher as of December 31, 2017, equity would have been 88 million (previous year: 60 million) lower. If market interest rates had been 100 bps lower as of December 31, 2017, equity would have been 24 million (previous year: 60 million) higher. If market interest rates had been 100 bps higher as of December 31, 2017, earnings after tax would have been 76 million (previous year: 10 million) higher. If market interest rates had been 100 bps lower as of December 31, 2017, earnings after tax would have been 64 million (previous year: 24 million) lower Commodity price risk Commodity price risk in the Volkswagen Group (excluding Volkswagen Financial Services subgroup) primarily results from price fluctuations and the availability of ferrous and non-ferrous metals, precious metals, commodities required in connection with the Group s digitalization and electrification strategy, as well as of coal, CO 2 certificates and rubber. Commodity price risk is limited by entering into forward transactions and swaps. Up to the end of 2016, hedge accounting in accordance with IAS 39 was applied in some cases to the hedging of commodity risk associated with aluminum and coal. Since the beginning of 2017, hedge accounting has not been applied to these hedging relationships. Commodity price risk within the meaning of IFRS 7 is presented using sensitivity analyses. These show the effect on earnings after tax of changes in the risk variable commodity prices. If the commodity prices of the hedged nonferrous metals, coal and rubber had been 10% higher (lower) as of December 31, 2017, earnings after tax would have been 101 million (previous year: 82 million) higher (lower). If the commodity prices of the hedges included in hedge accounting had been 10% higher (lower) as of December 31, 2016, equity would have been 48 million higher (lower). As of the end of 2017, hedge accounting was not applied to these hedging relationships Equity and bond price risk The Spezialfonds (special funds) launched using surplus liquidity and the equity interests measured at fair value are subject in particular to equity price and bond price risk, which can arise from fluctuations in quoted market prices, stock exchange indices and market rates of interest. The changes in bond prices resulting from variations in the market rates of interest are quantified in sections and 4.2.2, as are the measurement of foreign currency and other interest rate risks arising from the special funds and the equity interests measured at fair value. As a rule, we counter the risks arising from the special funds by ensuring a broad diversification of products, issuers and regional markets when investing funds, as stipulated by our Investment Guidelines. In addition, we hedge exchange rates when market conditions are appropriate. As part of the presentation of market risk, IFRS 7 requires disclosures on how hypothetical changes in risk variables affect the price of financial instruments. Potential risk variables here are in particular quoted market prices or indices, as well as interest rate changes as bond price parameters. If share prices had been 10% higher as of December 31, 2017, equity would have been 28 million (previous year: 4 million) higher. If share prices had been 10% lower as of December 31, 2017, equity would have been 108 million (previous year: 28 million) lower.

294 290 Notes to the Consolidated Financial Statements Consolidated Financial Statements 4.3 Market risk at Volkswagen Financial Services subgroup Exchange rate risk in the Volkswagen Financial Services subgroup is mainly attributable to assets that are not denominated in the functional currency and from refinancing within operating activities. Interest rate risk relates to refinancing without matching maturities and the varying interest rate elasticity of individual asset and liability items. The risks are limited by the use of currency and interest rate hedges. Microhedges and portfolio hedges are used for interest rate hedging. Fixed-rate assets and liabilities included in the hedging strategy are recognized at fair value, as opposed to their original subsequent measurement at amortized cost. The resulting effects in the income statement are offset by the corresponding gains and losses on the interest rate hedging instruments (swaps). Currency hedges (currency forwards and crosscurrency interest rate swaps) are used to mitigate foreign currency risk. All cash flows in foreign currency are hedged. As of December 31, 2017, the value at risk was 167 million (previous year: 95 million) for interest rate risk and 165 million (previous year: 199 million) for foreign currency risk. The entire value at risk for interest rate and foreign currency risk at the Volkswagen Financial Services subgroup was 167 million (previous year: 197 million). 5. METHODS FOR MONITORING HEDGE EFFECTIVENESS In the Volkswagen Group, hedge effectiveness is assessed prospectively using the critical terms match method and using statistical methods in the form of a regression analysis. Retrospective analysis of effectiveness uses effectiveness tests in the form of the dollar offset method or a regression analysis. Under the dollar offset method, the changes in value of the hedged item expressed in monetary units are compared with the changes in value of the hedging instrument expressed in monetary units. Where regression analysis is used, the change in value of the hedged item is presented as an independent variable, and that of the hedging instrument as a dependent variable. Hedge relationships are classified as effective if they have sufficient coefficients of determination and slope factors.

295 Consolidated Financial Statements Notes to the Consolidated Financial Statements 291 NOTIONAL AMOUNT OF DERIVATIVES REMAINING TERM TOTAL NOTIONAL AMOUNT TOTAL NOTIONAL AMOUNT million under one year within one to five years over five years Dec. 31, 2017 Dec. 31, 2016 Notional amount of hedging instruments used in cash flow hedges: Interest rate swaps 3,490 8, ,527 17,054 Currency forwards 32,329 35,538 67,867 84,754 Currency options 8,128 11,435 19,563 26,081 Cross-currency swaps 2,295 Cross-currency interest rate swaps ,951 Commodity future contracts 679 Notional amount of other derivatives: Interest rate swaps 20,483 48,067 20,125 88,675 84,612 Interest rate option contracts Currency forwards 19,592 2, ,535 28,436 Other currency options Cross-currency swaps 20,825 1,451 22,276 12,207 Cross-currency interest rate swaps 3,350 6, ,667 8,839 Commodity future contracts ,275 1,235 Both derivatives closed with offsetting transactions and the offsetting transactions themselves are included in the respective notional amount. The offsetting transactions cancel out the effects of the original hedging transactions. If the offsetting transactions were not included, the respective notional amount would be significantly lower. In addition to the derivatives used for hedging foreign currency, interest rate and price risk, the Group held options and other derivatives on equity instruments at the reporting date with a notional amount of 29 million (previous year: 45 million) whose remaining maturity is under one year. Existing cash flow hedges in the notional amount of 361 million (previous year: 811 million) were discontinued because of a reduction in the projections. 3 million (previous year: 5 million) was transferred from the cash flow hedge reserve to the financial result, reducing earnings. In addition, hedges were to be terminated due to internal risk regulations. Items hedged under cash flow hedges are expected to be realized in accordance with the maturity buckets of the hedges reported in the table. The fair values of the derivatives are estimated using market data at the balance sheet date as well as by appropriate valuation techniques. The following term structures were used for the calculation: in % EUR CHF CNY CZK GBP JPY KRW SEK USD Interest rate for six months Interest rate for one year Interest rate for five years Interest rate for ten years

296 292 Notes to the Consolidated Financial Statements Consolidated Financial Statements 35. Capital management The Group s capital management ensures that its goals and strategies can be achieved in the interests of shareholders, employees and other stakeholders. In particular, management focuses on generating the minimum return on invested assets in the Automotive Division that is required by the capital markets, and on increasing the return on equity in the Financial Services Division. In the process, it aims overall to achieve the highest possible growth in the value of the Group and its divisions for the benefit of all the Company s stakeholder groups. In order to maximize the use of resources in the Automotive Division and to measure the success of this, we have for a number of years been using a value-based management system, with value contribution as an absolute performance measure and return on investment (ROI) as a relative indicator. Value contribution is defined as the difference between operating profit after tax and the opportunity cost of invested capital. The opportunity cost of capital is calculated by multiplying the market cost of capital by average invested capital. Invested capital is calculated by taking the operating assets reported in the balance sheet (property, plant and equipment, intangible assets, lease assets, inventories and receivables) and deducting noninterest-bearing liabilities (trade payables and payments on account received). Average invested capital is derived from the balance at the beginning and the end of the reporting period. Despite the charges relating to the special items recognized in the operating result, the Automotive Division disclosed a positive value contribution of 5,935 million in the reporting period which, due to the improvement in the operating result before special items and an only slight increase in the cost of capital, was significantly higher than the prior-year figure. The return on investment (ROI) is defined as the return on invested capital for a particular period based on the operating result after tax. If the return on investment exceeds the market cost of capital, there is an increase in the value of the invested capital and a positive value contribution. In the Group, a minimum required rate of return on invested capital of 9% is defined, which applies to both the business units and the individual products and product lines. Our goal of generating a sustained return on investment of over 15% is anchored in Strategy The return on investment therefore serves as a consistent target in operational and strategic management and is used to measure target attainment for the Automotive Division, the individual business units, and projects and products. The return on investment achieved for the Automotive Division was 12.1%, which is above our minimum rate of return on invested capital of 9% and significantly exceeds the current cost of capital of 6.0%. Due to the specific features of the Financial Services Division, its management focuses on return on equity, a special target linked to invested capital. This measure is calculated as the ratio of earnings before tax to average equity. Average equity is calculated from the balance at the beginning and the end of the reporting period. In addition, the goals of the Financial Services Division are to meet the banking supervisory authorities regulatory capital requirements, to procure equity for the growth planned in the coming fiscal years and to support its external rating by ensuring capital adequacy. To ensure compliance with prudential requirements at all times, a planning procedure integrated into internal reporting has been put in place at the Volkswagen Bank, allowing the required equity to be continuously determined on the basis of actual and expected business performance. In the reporting period, this again ensured that regulatory minimum capital requirements were always met both at Group level and at the level of subordinate companies individual, specific capital requirements.

297 Consolidated Financial Statements Notes to the Consolidated Financial Statements 293 The return on investment and value contribution in the Automotive Division as well as the return on equity and the equity ratio in the Financial Services Division are shown in the following table: million Automotive Division¹ Operating result after tax 11,756 7,419 Invested capital (average) 97,021 91,020 Return on investment (RoI) in % Cost of capital in % Opportunity cost of invested capital 5,821 5,643 Value contribution² 5,935 1,775 Financial Services Division Earnings before tax 2,502 2,408 Average equity 25,626 22,342 Return on equity before tax in % Equity ratio in % Including proportionate inclusion of the Chinese joint ventures and allocation of consolidation adjustments between the Automotive and Financial Services Divisions; excluding effects on earnings and assets from purchase price allocation. 2 The value contribution corresponds to the Economic Value Added (EVA ). EVA is a registered trademark of Stern Stewart & Co. 36. Contingent liabilities million Dec. 31, 2017 Dec. 31, 2016 Liabilities under guarantees Liabilities under warranty contracts Assets pledged as security for third-party liabilities Other contingent liabilities 7,909 6,305 8,413 6,819 The trust assets and liabilities of the savings and trust entities belonging to the South American subsidiaries not included in the consolidated balance sheet amount to 768 million (previous year: 944 million). In the case of liabilities from guarantees, the Group is required to make specific payments if the debtors fail to meet their obligations. The other contingent liabilities primarily comprise potential liabilities arising from matters relating to taxes and customs duties, as well as litigation and proceedings relating to suppliers, dealers, customers, employees and investors. The contingent liabilities recognized in connection with the diesel issue totaled 4.3 billion, of which 3.4 billion was attributable to investor lawsuits. Also included are certain elements of the class action lawsuits relating to the diesel issue as well as criminal proceedings/misdemeanor proceedings as far as these can be quantified. As some of these proceedings are still at a very early stage, the plaintiffs have in a number of cases so far not specified the basis of their claims and/or there is insufficient certainty about the number of plaintiffs or the amounts being claimed. These lawsuits meet the definition of a contingent liability but cannot, as a rule, be disclosed because it is impossible to measure the amount involved.

298 294 Notes to the Consolidated Financial Statements Consolidated Financial Statements In addition, other contingent liabilities include an amount of 0.7 billion for potential liabilities from tax risks at MAN Latin America. In the tax proceedings involving MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities take a different position with regard to the tax effects of the acquisition structure for MAN Latin America chosen by MAN in It is not currently considered likely that a claim will be made against MAN Latin America in connection with these liabilities. On May 5, 2016, the U.S. National Highway Traffic Safety Administration (NHTSA) announced, jointly with the Takata company, a further extension of the recall for various models from different manufacturers containing certain airbags produced by the Takata company. Recalls were also ordered by the local authorities in individual countries. The recalls also included models manufactured by the Volkswagen Group. Appropriate provisions have been recognized. Currently, the possibility of further extensions to the recalls that could also affect Volkswagen Group models cannot be ruled out. It is not possible at the moment to provide further disclosures in accordance with IAS in relation to this matter because the technical investigations and consultations with the authorities are still being carried out. As permitted by IAS 37.92, in order not to prejudice the outcomes of the proceedings and the interests of the Company, we have not made any further disclosures about estimates in connection with the financial effects of, and disclosures about, uncertainty regarding the timing or amount of contingent liabilities in connection with the diesel issue and investigations by the European Commission. Further information can be found under the section entitled Litigation. 37. Litigation In the course of their operating activities, Volkswagen AG and the companies in which it is directly or indirectly invested become involved in a great number of legal disputes and governmental proceedings in Germany and abroad. In particular, such legal disputes and other proceedings may occur in relation to suppliers, dealers, customers, employees, or investors. For the companies involved, these may result in payment or other obligations. Above all, in cases where US customers assert claims for vehicle defects individually or by way of a class action, highly cost-intensive measures may have to be taken and substantial compensation or punitive damages paid. Corresponding risks also result from US patent infringement proceedings. Risks may also emerge in connection with the adherence to regulatory requirements. This particularly applies in the case of regulatory vagueness that may be interpreted differently by Volkswagen and the authorities responsible for the respective regulations. In addition, legal risks can arise from the criminal activities of individual persons, which even the best compliance management system can never completely prevent. Where transparent and economically viable, adequate insurance coverage was taken out for these risks. For the identifiable and measurable risks, provisions considered appropriate were recognized and information about contingent liabilities disclosed. As some risks cannot be assessed or can only be assessed to a limited extent, the possibility of loss or damage not being covered by the insured amounts and provisions cannot be ruled out. This particularly applies to legal risk assessment regarding the diesel issue. Diesel issue On September 18, 2015, the US Environmental Protection Agency (EPA) publicly announced in a Notice of Violation that irregularities in relation to nitrogen oxide (NO x ) emissions had been discovered in emissions tests on certain vehicles of Volkswagen Group with type 2.0 l diesel engines in the USA. It was alleged that Volkswagen had installed undisclosed engine management software installed in 2009 to 2015 model year 2.0 l diesel engines to circumvent NO x emissions testing regulations in the USA in order to comply with certification requirements. The California Air Resources Board (CARB), a unit of the US environmental authority of California, announced its own enforcement investigation into this matter.

299 Consolidated Financial Statements Notes to the Consolidated Financial Statements 295 In this context, Volkswagen AG announced that noticeable discrepancies between the figures achieved in testing and in actual road use had been identified in around eleven million vehicles worldwide with type EA 189 diesel engines. The vast majority of these engines were type EA 189 Euro 5 engines. On November 2, 2015, the EPA issued a Notice of Violation alleging that irregularities had also been discovered in the software installed in US vehicles with type V6 3.0 l diesel engines. CARB also issued a letter announcing its own enforcement investigation into this matter. AUDI AG has confirmed that at least three auxiliary emission control devices were inadequately disclosed in the course of the US approval documentation. Around 113 thousand vehicles from the 2009 to 2016 model years with certain six-cylinder diesel engines were affected in the USA and Canada, where regulations governing NO x emissions limits for vehicles are stricter than those in other parts of the world. Numerous court and governmental proceedings were subsequently initiated in the USA and the rest of the world. During the reporting period, we succeeded in ending most significant court and governmental proceedings in the USA by concluding settlement agreements. This includes, in particular, settlements with the US Department of Justice (DOJ). Outside the USA, we also reached agreements with regard to the implementation of the technical measures with numerous authorities. The Supervisory Board of Volkswagen AG formed a special committee that coordinates the activities relating to the diesel issue for the Supervisory Board. The global law firm Jones Day was instructed by Volkswagen AG to carry out an extensive investigation of the diesel issue in light of the DOJ s and the Braunschweig public prosecutor s criminal investigations as well as other investigations and proceedings which were expected. Jones Day was instructed by Volkswagen AG to present factual evidence to the DOJ. To resolve US criminal law charges, Volkswagen AG and the DOJ entered into a Plea Agreement, which includes a Statement of Facts containing a summary of the factual allegations which the DOJ considered relevant to the settlement with Volkswagen AG. The Statement of Facts is based in part on Jones Day s factual findings as well as the evidence identified by the DOJ itself. Jones Day has completed the work required to assist Volkswagen AG in assessing the criminal charges in the USA with respect to the diesel issue. However, work in respect of the legal proceedings which are still pending in the USA and the rest of the world is ongoing and will require considerable efforts and a considerable period of time. In connection with this work, Volkswagen AG is being advised by a number of external law firms. Furthermore, in September 2015, Volkswagen AG filed a criminal complaint in Germany against unknown persons as did AUDI AG. Volkswagen AG and AUDI AG are cooperating with all responsible authorities in the scope of reviewing the incidents. Potential consequences for Volkswagen s results of operations, financial position and net assets could emerge primarily in the following legal areas: 1. Coordination with the authorities on technical measures Based on decisions dated October 15, 2015, the Kraftfahrt-Bundesamt (KBA German Federal Motor Transport Authority) ordered the Volkswagen Passenger Cars, Volkswagen Commercial Vehicles and SEAT brands to recall all the diesel vehicles that had been issued with vehicle type approval by the KBA from among the eleven million vehicles affected with type EA 189 engines. The recall concerns the member states of the European Union (EU28). On December 10, 2015 a similar decision was issued regarding Audi vehicles with the EA 189 engine. The timetable and action plan forming the basis for the recall order corresponded to the proposals presented in advance by Volkswagen. Depending on the technical complexity of the concerned remedial actions, this means that the Volkswagen Group has been recalling the affected vehicles, of which there are around 8.5 million in total in the EU28 countries, to the service workshops since January The remedial actions differ in scope depending on the engine variant. The technical measures cover software and in some cases hardware modifications, depending on the series and model year. The technical measures for all vehicles in the European Union have since been approved without exception. The KBA ascertained for all clusters (groups of vehicles) that implementation of the technical measures would not bring about any adverse changes in fuel consumption figures, CO 2 emissions figures, engine power, maximum torque and noise emissions. Once the modifications have been made, the vehicles will thus also continue to comply with the legal requirements and the emission standards applicable in each case. The technical measures for all affected vehicles with type EA 189 engines in the European Union were approved without exception, and implemented in most cases.

300 296 Notes to the Consolidated Financial Statements Consolidated Financial Statements In some countries outside the EU among others South Korea, Taiwan and Turkey national type approval is based on prior recognition of the EC/ECE type approval; the technical measures must therefore be approved by the national authorities. With the exception of South Korea and Chile, we were able to conclude this approval process in all countries. There, the majority of approvals were likewise granted; in relation to the pending approvals, Volkswagen is in close contact with the authorities. In addition, there is an intensive exchange of information with the authorities in the USA and Canada, where Volkswagen s proposed modifications in relation to the four-cylinder and the six-cylinder diesel engines also have to be approved. Due to NO x limits that are considerably stricter than in the EU and the rest of the world, it is a greater technical challenge here to refit the vehicles so that the emission standards defined in the settlement agreements for these vehicles can be achieved. For many months, AUDI AG has been intensively checking all diesel concepts for possible discrepancies and retrofit potentials. A systematic review process for all engine and gear variants has been underway since On June 14, 2017, based on a technical error in the parameterization of the transmission software for a limited number of specific Audi A7/A8 models that AUDI AG itself discovered and reported to the KBA, the KBA issued an order under which a correction proposed by AUDI AG will be submitted. The technical error lies in the fact that, in the cases concerned, by way of exception a specific function that is standard in all other vehicle concepts is not implemented in actual road use. In Europe, this affects around 24,800 units of certain Audi A7/A8 models. The KBA has not categorized this error as an unlawful defeat device. On July 21, 2017, AUDI AG offered a software-based retrofit program for up to 850,000 vehicles with V6 and V8 TDI engines meeting the Euro 5 and Euro 6 emission standards in Europe and other markets except the USA and Canada. The measure will mainly serve to further improve the vehicles emissions in real driving conditions in inner city areas beyond the legal requirements. This was done in close cooperation with the authorities, which were provided with detailed reports, especially the German Federal Ministry of Transport and the KBA. The retrofit package comprises voluntary measures and, to a small extent, measures directed by the authorities; these are measures taken within the scope of a recall, which were proposed by AUDI AG itself, reported to the KBA and taken up and ordered by the latter. The voluntary tests have already reached an advanced stage, but have not yet been completed. The measures adopted and mandated by the KBA involved the recall of different diesel vehicles with a V6 or V8 engine meeting the Euro 6 emission standard, for which the KBA categorized certain emission strategies as an unlawful defeat device. From July 2017 to January 2018, the measures proposed by AUDI AG were adopted and mandated in various decisions by the KBA on vehicle models with V6 and V8 TDI engines. Currently, AUDI AG assumes that the total costs of the software-based retrofit program including the amount based on recalls will be manageable and has recognized corresponding balance-sheet risk provisions. Should additional measures become necessary as a result of the investigations by AUDI AG and the consultations with the KBA, AUDI AG will quickly implement these as part of the retrofit program in the interest of customers. 2. Criminal and administrative proceedings worldwide (excluding the USA/Canada) In addition to the described approval processes with the responsible registration authorities, in some countries criminal investigations/misdemeanor proceedings (for example, by the public prosecutor s office in Braunschweig and Munich, Germany) and/or administrative proceedings (for example, by the Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin the German Federal Financial Supervisory Authority) have been opened. The public prosecutor s offices in Braunschweig and Munich are investigating the core issue of the criminal investigations. Whether this will result in fines for the Company, and if so what their amount might be, is currently subject to estimation risks. According to Volkswagen s estimates so far, the likelihood of a sanction in the majority of these proceedings is less than 50%. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%.

301 Consolidated Financial Statements Notes to the Consolidated Financial Statements Product-related lawsuits worldwide (excluding the USA/ Canada) In principle, it is possible that customers in the affected markets will file civil lawsuits against Volkswagen AG and other Volkswagen Group companies. In addition, it is possible that importers and dealers could assert claims against Volkswagen AG and other Volkswagen Group companies, e.g. through recourse claims. As well as individual lawsuits, class action lawsuits are possible in various jurisdictions (albeit not in Germany). Furthermore, in a number of markets it is possible that consumer and/or environmental organizations will apply for an injunction or assert claims for a declaratory judgment or for damages. In the context of the diesel issue, various lawsuits are currently pending against Volkswagen AG and other Volkswagen Group companies at present. There are pending class action proceedings and lawsuits brought by consumer and/or environmental associations against Volkswagen AG and other companies of the Volkswagen Group in various countries such as Argentina, Australia, Belgium, Brazil, China, the Czech Republic, Israel, Italy, Mexico, the Netherlands, Poland, Portugal, Switzerland, Taiwan and the United Kingdom. The class action proceedings are lawsuits aimed among other things at asserting damages or, as is the case in the Netherlands, at a declaratory judgment that customers are entitled to damages. With the exception of Brazil, where there has already been a non-binding judgment in the first instance, the amount of these damages cannot yet be quantified more precisely due to the early stage of the proceedings. Volkswagen does not estimate the litigants prospect of success to be more than 50% in any of the class action proceedings. In South Korea, various mass proceedings are pending (in some of these individual lawsuits several hundred litigants have been aggregated). These lawsuits have been filed to assert damages and to rescind the purchase contract including repayment of the purchase price. Due to special circumstances in the market and specific characteristics of the South Korean legal system, Volkswagen estimates the litigants prospects of success in the South Korean mass proceedings mentioned above to be inherently higher than in other jurisdictions outside the USA and Canada. On May 12, 2017, one first-instance judgment was delivered in these proceedings in South Korea during the fiscal year, in which the court completely dismissed an action filed to assert criminal damages over pollution. The judgment has since become binding. Contingent liabilities have been disclosed for pending class action and mass proceedings that can be assessed and for which the chance of success was deemed not implausible. Provisions were recognized to a small extent. Furthermore, individual lawsuits and similar proceedings are pending against Volkswagen AG and other Volkswagen Group companies in numerous countries. In Germany, there are around 9,500 individual lawsuits. In Italy, Austria and Spain, lawsuits numbering in the low three-digit range and in France and Ireland individual lawsuits in the two-digit range are pending against Volkswagen AG and other companies of the Volkswagen Group, most of which are aimed at asserting damages or rescinding the purchase contract. In addition, on November 29, 2017, Volkswagen AG was served with an action brought by financialright GmbH asserting the rights assigned to it by a total of approximately 15,000 customers in Germany. This action seeks the payment of around 350 million in return for restitution of the vehicles. In Switzerland, a claim for damages was brought against Volkswagen AG in December 2017 from the assigned rights of some 6,000 customers; the stated amount in dispute is approximately 30 million Swiss francs. According to Volkswagen s estimates so far, the litigants prospect of success is below 50% in the vast majority of the individual lawsuits. Contingent liabilities have therefore been disclosed for those lawsuits that can be assessed and for which the chance of success was deemed not implausible. It is too early to estimate how many customers will take advantage of the option to file lawsuits in the future, beyond the existing lawsuits, or what their prospects of success will be.

302 298 Notes to the Consolidated Financial Statements Consolidated Financial Statements 4. Lawsuits filed by investors worldwide (excluding the USA/ Canada) Investors from Germany and abroad have filed claims for damages against Volkswagen AG in some cases along with Porsche Automobil Holding SE (Porsche SE) as joint and several debtors based on purported losses due to alleged misconduct in capital market communications in connection with the diesel issue. The vast majority of these investor lawsuits are currently pending at the District Court (Landgericht) in Braunschweig. On August 5, 2016, the District Court in Braunschweig ordered that common questions of law and fact relevant to the lawsuits pending at the District Court in Braunschweig be referred to the Higher Regional Court (Oberlandesgericht) in Braunschweig for a binding declaratory decision pursuant to the German Act on Model Case Proceedings in Disputes Regarding Capital Market Information (Kapitalanleger-Musterverfahrensgesetz KapMuG). In this proceeding, common questions of law and fact relevant to these actions shall be adjudicated in a consolidated manner by the Higher Regional Court in Braunschweig (model case proceedings). All lawsuits at the District Court in Braunschweig will be stayed pending up until resolution of the common issues, unless they can be dismissed for reasons independent of the common issues that are adjudicated in the model case proceedings. The resolution of the common questions of law and fact in the model case proceedings will be binding for all pending cases in the stayed lawsuits. At the District Court in Stuttgart, further investor lawsuits have been filed against Volkswagen AG, in some cases along with Porsche SE as joint and several debtors. On December 6, 2017, the District Court in Stuttgart issued an order for reference to the Higher Regional Court in Stuttgart in relation to procedural issues, particularly for clarification of jurisdiction. On account of the diesel issue, model case proceedings against Porsche SE are also pending before the Higher Regional Court in Stuttgart. Further investor lawsuits have been filed at various courts in Germany as well as in Austria and the Netherlands. In Austria, the Supreme Court ruled on July 7, 2017 that the investor lawsuits against Volkswagen AG do not fall within the jurisdiction of the Austrian courts. Consequently, all but one of the investor lawsuits that were formerly pending in Austria have been dismissed or withdrawn. The last pending lawsuit has been dismissed at first instance. Worldwide (excluding USA and Canada), investor lawsuits, judicial applications for dunning procedures and conciliation proceedings, and claims under the KapMuG are currently pending against Volkswagen in connection with the diesel issue, with the claims totaling approximately 9 billion. Volkswagen remains of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized for these investor lawsuits. Insofar as the chance of success was estimated at not lower than 10%, contingent liabilities have been disclosed. 5. Proceedings in the USA/Canada Following the publication of the EPA s Notices of Violation, Volkswagen AG and other Volkswagen Group companies have been the subject of intense scrutiny, ongoing investigations (civil and criminal) and civil litigation. Volkswagen AG and other Volkswagen Group companies have received subpoenas and inquiries from state attorneys general and other govern- mental authorities and are responding to such investigations and inquiries. In addition, Volkswagen AG and other Volkswagen Group companies in the USA/Canada are facing litigation on a number of different fronts relating to the matters described in the EPA s Notices of Violation. A large number of putative class action lawsuits by customers and dealers have been filed in US federal courts and consolidated for pretrial coordination purposes in the federal multidistrict litigation proceeding in the State of California. On January 4, 2016, the DOJ, Civil Division, on behalf of the EPA, initiated a civil complaint against Volkswagen AG, AUDI AG and certain other Volkswagen Group companies. The action sought statutory penalties under the US Clean Air Act, as well as certain injunctive relief, and was consolidated for pretrial coordination purposes in the California multidistrict litigation. On January 12, 2016, CARB announced that it intended to seek civil fines for alleged violations of the California Health & Safety Code and various CARB regulations. In June 2016, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates reached settlement agreements with the DOJ on behalf of the EPA, CARB and the California Attorney General, private plaintiffs represented by a Plaintiffs Steering Committee (PSC) in the multidistrict litigation pending in California, and the U.S. Federal Trade Commission (FTC). These settlement agreements resolved certain civil claims made in relation to affected diesel vehicles with 2.0 l TDI engines from the Volkswagen Passenger Cars and Audi brands

303 Consolidated Financial Statements Notes to the Consolidated Financial Statements 299 in the USA. Volkswagen AG and certain affiliates also entered into a First Partial Consent Decree with the DOJ, EPA, CARB and the California Attorney General, which was lodged with the court on June 28, On October 18, 2016, a fairness hearing on whether final approval should be granted was held, and on October 25, 2016, the court granted final approval of the settlement agreements and the partial consent order. A number of class members have filed appeals to an US appellate court from the order approving the settlements. The settlements include buyback or, for leased vehicles, early lease termination, or a free emissions modification of the vehicles, provided that the EPA and CARB approve the modification. Volkswagen will also make additional cash payments to affected current owners or lessees as well as certain former owners or lessees. Volkswagen also agreed to support environmental programs. The company will pay USD 2.7 billion over three years into an environmental trust, managed by a trustee appointed by the court, to offset excess nitrogen oxide (NO x ) emissions. Volkswagen will also invest a total of USD 2.0 billion over ten years in zero emissions vehicle infrastructure as well as corresponding access and awareness initiatives. Volkswagen AG and certain affiliates also entered into a separate Partial Consent Decree with CARB and the California Attorney General resolving certain claims under California unfair competition, false advertising, and consumer protection laws related to both the 2.0 l and 3.0 l TDI vehicles, which was lodged with the court on July 7, Under the terms of the agreement, Volkswagen agreed to pay California USD 86 million. The court entered judgment on the Partial Consent Decree on September 1, 2016 and the USD 86 million payment was made on September 28, On December 20, 2016, Volkswagen entered into a Second Partial Consent Decree, subject to court approval, with the DOJ, EPA, CARB and the California Attorney General that resolved claims for injunctive relief under the Clean Air Act and California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to implement a buyback and lease termination program for Generation l TDI vehicles and a free emissions recall and modification program for Generation l TDI vehicles, and to pay USD 225 million into the environmental mitigation trust that has been established pursuant to the First Partial Consent Decree. The Second Partial Consent Decree was lodged with the court on December 20, 2016 and approved on May 17, In addition, on December 20, 2016, Volkswagen entered into an additional, concurrent California Second Partial Consent Decree, subject to court approval, with CARB and the California Attorney General that resolved claims for injunctive relief under California environmental, consumer protection and false advertising laws related to the 3.0 l TDI vehicles. Under the terms of this Consent Decree, Volkswagen agreed to provide additional injunctive relief to California, including the implementation of a Green City initiative and the introduction of three new Battery Electric Vehicle (BEV) models in California by 2020, as well as a USD 25 million payment to CARB to support the availability of BEVs in California. On January 11, 2017, Volkswagen entered into a Third Partial Consent Decree with the DOJ and EPA that resolved claims for civil penalties and injunctive relief under the Clean Air Act related to the 2.0 l and 3.0 l TDI vehicles. Volkswagen agreed to pay USD 1.45 billion (plus any accrued interest) to resolve the civil penalty and injunctive relief claims under the Clean Air Act, as well as the customs claims of the US Customs and Border Protection. Under the Third Partial Consent Decree, the injunctive relief includes monitoring, auditing and compliance obligations. This Consent Decree, which was subject to public comment, was lodged with the court on January 11, 2017 and approved on April 13, Also on January 11, 2017, Volkswagen entered into a settlement agreement with the DOJ to resolve any claims under the Financial Institutions Reform, Recovery and Enforcement Act of 1989 and agreed to pay USD 50 million (plus any accrued interest), specifically denying any liability and expressly disputing any claims.

304 300 Notes to the Consolidated Financial Statements Consolidated Financial Statements On July 21, 2017, the federal court in the multidistrict litigation in California approved the Third California Partial Consent Decree, in which Volkswagen AG and certain affiliates agreed with the California Attorney General and CARB to pay USD million in civil penalties and cost reimbursements. These penalties covered California environmental penalties for both the 2.0 l and 3.0 l TDI vehicles. An agreement in principle had been reached on January 11, The DOJ also opened a criminal investigation focusing on allegations that various federal law criminal offenses were committed. On January 11, 2017, Volkswagen AG agreed to plead guilty to three federal criminal felony counts, and to pay a USD 2.8 billion criminal penalty. Pursuant to the terms of this agreement, Volkswagen will be on probation for three years and will work with an independent monitor for three years. The independent monitor will assess and oversee the company s compliance with the terms of the resolution. This includes overseeing the implementation of measures to further strengthen compliance, reporting and monitoring systems, and an enhanced ethics program. Volkswagen will also continue to cooperate with the DOJ s ongoing investigation of individual employees or former employees who may be responsible for criminal violations. Moreover, investigations by various US regulatory and government authorities are ongoing, including in areas relating to securities, financing and tax. On January 31, 2017, Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates entered into a settlement agreement with private plaintiffs represented by the PSC in the multidistrict litigation pending in California, and a consent order with the FTC. These agreements resolved certain civil claims made in relation to affected diesel vehicles with 3.0 l TDI engines from the Volkswagen, Audi and Porsche brands in the USA. On February 14, 2017, the court preliminarily approved the settlement agreement with private plaintiffs. On May 11, 2017, the court held a fairness hearing on whether approval should be granted and on May 17, 2017, the court granted final approval of the settlement agreement and the partial stipulated consent order. Under the settlements, consumers options and compensation will depend on whether their vehicles are classified as Generation 1 or Generation 2. Generation 1 (model years ) consumers will have the option of a buyback, early lease termination, trade-in, or a free emissions modification, provided that EPA and CARB approve the modification. Additionally, Generation 1 owners and lessees, as well as certain former owners and lessees, will be eligible to receive cash payments. Generation 2 (model years ) consumers will receive a free emissions-compliant repair to bring the vehicles into compliance with the emissions standards to which they were originally certified, as well as cash payments. Volkswagen has received approval from the EPA and CARB for emissions-compliant repairs within the time limits set out in the settlement agreement. Volkswagen will also make cash payments to certain former Generation 2 owners or lessees. In September 2016, Volkswagen announced that it had finalized an agreement to resolve the claims of Volkswagen branded franchise dealers in the USA relating to TDI vehicles and other matters asserted concerning the value of the franchise. The settlement agreement includes a cash payment of up to USD 1,208 billion, and additional benefits to resolve alleged past, current, and future claims of losses in franchise value. On January 18, 2017, a fairness hearing on whether final approval should be granted was held, and on January 23, 2017, the court granted final approval of the settlement agreement.

305 Consolidated Financial Statements Notes to the Consolidated Financial Statements 301 Additionally, in the USA, some putative class actions, some individual customers lawsuits and some state or municipal claims have been filed in state courts. Volkswagen reached separate agreements with the attorneys general of 45 US states, the District of Columbia and Puerto Rico, to resolve their existing or potential consumer protection and unfair trade practices claims in connection with both 2.0 l TDI and 3.0 l TDI vehicles in the USA for a settlement amount of USD 622 million. Five states did not join these settlements and still have consumer claims outstanding: Arizona, New Mexico, Oklahoma, Vermont and West Virginia. Volkswagen has also reached separate agreements with the attorneys general of eleven US states (Connecticut, Delaware, Maine, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Vermont, and Washington) to resolve their existing or potential future claims for civil penalties and injunctive relief for alleged violations of environmental laws for a settlement amount of 207 million. The attorneys general of ten other US states (Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, New Mexico, Ohio, Tennessee and Texas) and some municipalities have also filed suits in state and federal courts against Volkswagen AG, Volkswagen Group of America, Inc. and certain affiliates, seeking civil penalties and injunctive relief for alleged violations of environmental laws. Illinois, Maryland, Minnesota, Missouri, Montana, New Hampshire, Ohio, Tennessee and Texas participated in the state settlements described above with respect to consumer protection and unfair trade practices claims, but those settlements did not include claims for environmental penalties. The environmental claims of two other states Alabama and Wyoming have been dismissed as preempted by federal law. Alabama has appealed this dismissal. In addition to the lawsuits described above, for which provisions have been recognized, a putative class action has been filed on behalf of purchasers of Volkswagen AG American Depositary Receipts, alleging a drop in price purportedly resulting from the matters described in the EPA s Notices of Violation. A putative class action has also been filed on behalf of purchasers of certain USD-denominated Volkswagen bonds, alleging that these bonds were trading at artificially inflated prices due to Volkswagen s alleged misstatements and that the value of these bonds declined after the EPA issued its Notices of Violation. These lawsuits have also been consolidated in the federal multidistrict litigation proceeding in the State of California described above. Volkswagen is of the opinion that it duly complied with its capital market obligations. Therefore, no provisions have been recognized. In addition, contingent liabilities have not been disclosed as they currently cannot be measured. In Canada, civil consumer claims and regulatory investigations have been initiated for vehicles with 2.0 l and 3.0 l TDI engines. On December 19, 2016, Volkswagen AG and other Canadian and US Volkswagen Group companies reached a class action settlement in Canada with consumers relating to 2.0 l diesel vehicles. Also on December 19, 2016, Volkswagen Group Canada agreed with the Commissioner of Competition in Canada to a civil resolution regarding its regulatory inquiry into consumer protection issues as to those vehicles. On December 21, 2017, Volkswagen announced an agreement in principle on a proposed consumer settlement in Canada involving 3.0 l diesel vehicles. The court preliminarily approved the settlement agreement on January 12, 2018, and the notice and opt out period began on January 17, Final approval hearings are scheduled in Quebec and Ontario for April 3 and 5, 2018, respectively. On January 12, 2018, Volkswagen and the Canadian Commissioner of Competition reached a resolution related to civil consumer protection issues relating to 3.0 l diesel vehicles. Also, criminal enforcement-related investigations by the federal environmental regulator and quasi-criminal enforcement-related investigations by a provincial environmental regulator are ongoing in Canada related to 2.0 l and 3.0 l diesel vehicles. On September 15, 2017, a provincial regulator in Canada, the Ontario Ministry of the Environment and Climate Change, charged Volkswagen AG under the province s environmental statute with one count alleging that it caused or permitted the operation of model year Volkswagen and Audi brand 2.0 l diesel vehicles that did not comply with prescribed emission standards. Following initial court appearances on November 15, 2017 and February 7, 2018, the matter was put over to April 4, 2018 pending ongoing evidence disclosure. No trial date has been set. Provisions have been recognized for possible obligations stemming from pending lawsuits in Canada.

306 302 Notes to the Consolidated Financial Statements Consolidated Financial Statements Moreover, in Canada, two securities class actions by investors in Volkswagen AG American Depositary Receipts and shares are pending against Volkswagen AG in the Quebec and Ontario provincial courts. These actions allege misrepresentations and omissions in financial reporting issued from stemming from the diesel issue. The proposed class periods are for residents in the provinces who purchased the relevant securities between March 12, 2009 and September 18, 2015, and held all or some of the acquired securities until after the alleged first corrective disclosures. Discovery has not begun. In both actions, motions for certification were filed. In the Quebec matter, the motion was heard on February 5 and 6, 2018 and the court s decision is on reserve. In the Ontario matter, the motion is scheduled for hearing on July 10 and 11, In addition, putative class action and joinder lawsuits by customers, and a certified environmental class action on behalf of residents, remain pending in certain provincial courts in Canada. An assessment of the underlying situation is not possible at this early stage of those proceedings. 6. Additional proceedings With its ruling from November 8, 2017, the Higher Regional Court of Celle ordered, upon the request of three US funds, the appointment of a special auditor for Volkswagen AG. The special auditor should examine whether there was a breach of duties on behalf of the members of the Board of Management and Supervisory Board of Volkswagen AG in connection with the diesel issue starting from June 22, 2006 and if this resulted in damages for Volkswagen AG. The ruling from the Higher Regional Court of Celle is formally legally binding. However, Volkswagen AG lodged a constitutional complaint toward the German Federal Constitutional Court regarding the infringement of its constitutionally guaranteed rights. It is currently unclear when the Federal Constitutional Court will reach a decision on this matter. In addition, the District Court of Hanover has filed a second motion for the appointment of a special auditor for Volkswagen AG, which is also aimed at the examination of transactions in connection with the diesel issue. This proceeding will be suspended until the ruling has been announced by the Federal Constitutional Court. 7. Risk assessment regarding the diesel issue To protect against the currently known legal risks related to the diesel issue, provisions of approximately 2.0 billion exist as of December 31, 2017 on the basis of existing information and current assessments. Beyond this, appropriate provisions have been recognized for defense and legal advice expenses. Insofar as these can be adequately measured at this stage, total contingent liabilities in relation to the diesel issue to the aggregate amount of 4.3 billion (previous year: 3.2 billion), of which lawsuits filed by investors account for 3.4 billion (previous year: 3.1 billion), were disclosed in the notes. The provisions recognized for this matter and the contingent liabilities disclosed as well as the other latent legal risks are partially subject to substantial estimation risks given the complexity of the individual factors, the ongoing approval process with the authorities and the fact that the independent, comprehensive investigations have not yet been completed. In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to the diesel issue. This is so as to not compromise the results of the proceedings or the interests of the Company.

307 Consolidated Financial Statements Notes to the Consolidated Financial Statements 303 Additional important legal cases In 2011, ARFB Anlegerschutz UG (haftungsbeschränkt) brought an action against Volkswagen AG and Porsche Automobil Holding SE for claims for damages for allegedly violating disclosure requirements under capital market law in connection with the acquisition of ordinary shares in Volkswagen AG by Porsche in The damages currently being sought based on allegedly assigned rights amounted to approximately 2.26 billion plus interest. In April 2016, the District Court in Hanover had formulated numerous objects of declaratory judgment that the cartel senate of the Higher Regional Court in Celle will decide on in model case proceedings under the KapMuG. In the first hearing on October 12, 2017, the senate indicated that it currently does not see claims against Volkswagen AG as justified, both in view of a lack of substantiated evidence and for legal reasons. Some of the desired objects of declaratory judgment on the litigants side may also be inadmissible, it said. Volkswagen AG sees the statements of the court s senate as confirmation that the claims made against the company have absolutely no basis. At the time (2010/2011), other investors had also asserted claims including claims against Volkswagen AG arising out of the same circumstances in an approximate total amount of 4.6 billion and initiated conciliation proceedings. Volkswagen AG always refused to participate in these conciliation proceedings; since then, these claims have not been pursued further. In 2011, the European Commission conducted searches at European truck manufacturers on suspicion of an unlawful exchange of information during the period and issued a statement of objections to MAN, Scania and the other truck manufacturers concerned in November With its settlement decision in July 2016, the European Commission fined five European truck manufacturers. MAN s fine was waived in full as the company had informed the European Commission about the irregularities as a key witness. In September 2017, the European Commission then fined Scania 0.88 billion. Scania has appealed to the European Court in Luxembourg and will use all means at its disposal to defend itself. Scania had already recognized a provision of 0.4 billion in Furthermore, antitrust lawsuits for damages from customers were received. As is the case in any antitrust proceedings, this may result in further lawsuits for damages. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. The Annual General Meeting of MAN SE approved the conclusion of a control and profit and loss transfer agreement between MAN SE and Volkswagen Truck & Bus GmbH (formerly Truck & Bus GmbH), a subsidiary of Volkswagen AG, in June In July 2013, award proceedings were instituted to review the appropriateness of the cash settlement set out in the agreement in accordance with section 305 of the Aktiengesetz (AktG German Stock Corporation Act) and the cash compensation in accordance with section 304 of the AktG. It is not uncommon for noncontrolling interest shareholders to institute such proceedings. In July 2015, the Munich Regional Court ruled in the first instance that the amount of the cash settlement payable to the noncontrolling interest shareholders of MAN should be increased from to per share; at the same time, the amount of the cash compensation was confirmed. The assessment of liability for put options and compensation rights granted to noncontrolling interest shareholders was adjusted in Both applicants and Volkswagen Truck & Bus GmbH have appealed to the Higher Regional Court in Munich. Volkswagen continues to maintain that the results of the valuation are correct. The appropriateness of the valuation was confirmed by the audit firms engaged by the parties and by the court-appointed auditor of the agreement. Within the scope of the European Commission's ongoing antitrust investigations regarding German automakers, authorities examined documents in the offices of Volkswagen AG in Wolfsburg and AUDI AG in Ingolstadt as part of an announced review. The Volkswagen Group and the Group brands concerned have been cooperating fully and for a long time with the European Commission and have submitted a corresponding application. It is currently unclear whether the European Commission will instigate formal proceedings. In addition, a few national and international authorities have initiated antitrust investigations. Volkswagen is cooperating closely with the responsible authorities in these investigations. An assessment of the underlying situation is not possible at this early stage.

308 304 Notes to the Consolidated Financial Statements Consolidated Financial Statements Since November 2016, Volkswagen has been responding to information requests from the EPA and CARB related to automatic transmissions in certain vehicles with petrol engines. Additionally, fourteen putative class actions have been filed against Audi and certain affiliates alleging that defendants concealed the existence of defeat devices in Audi brand vehicles with automatic transmissions. All of these putative class actions have been transferred to the federal multidistrict litigation proceeding in the State of California, and plaintiffs filed a consolidated class action complaint on October 12, 2017, which Volkswagen AG and certain of its affiliates moved to dismiss on December 11, On January 16, 2018, plaintiffs filed an opposition to the motion to dismiss and the court has set a deadline of February 16, 2018 for defendants to file a reply. A hearing is scheduled for May 11, On December 22, 2017, a mass action on behalf of approximately 75 individual plaintiffs alleging similar claims was filed in a California state court, which was removed to the Northern District of California on January 25, In Canada, two similar putative class actions, including a national class, have been filed in Ontario and Quebec provincial courts against AUDI AG, Volkswagen AG and US and Canadian affiliates regarding alleged CO 2 defeat devices in certain petrol Audi models with automatic transmissions. Both of the Canadian actions are in the pre-certification stage. Contingent liabilities have therefore been disclosed in cases where they can be assessed and for which the likelihood of a sanction was deemed not lower than 10%. From July through November 2017, plaintiffs filed numerous complaints in various US jurisdictions on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen AG and other Group companies. These complaints assert claims under the US Sherman Antitrust Act, the Racketeer Influenced and Corrupt Organizations Act, state unfair competition and consumer protection statutes, and common law unjust enrichment. The complaints allege that since the 1990s, defendants engaged in a conspiracy to unlawfully increase the prices of German luxury vehicles by agreeing to share commercially sensitive information and to reach unlawful agreements regarding technology, costs, and suppliers. Moreover, the plaintiffs allege that the defendants agreed to limit the size of AdBlue tanks to ensure that US emissions regulators did not scrutinize the emissions control systems in defendants vehicles, and that such an agreement for Volkswagen was the impetus for the creation of the defeat device. On September 28, 2017, a hearing before the Judicial Panel on Multidistrict Litigation (JPML) was held, and on October 4, 2017 the JPML issued its decision consolidating and transferring these cases to Judge Breyer in the Northern District of California. On December 14, 2017, co-lead counsel were appointed representing the interests of a putative class of indirect purchasers and a putative class of direct purchasers, as well as Plaintiffs Steering Committee. On December 20, 2017, deadlines were set for the filing of initial and responsive pleadings and an initial case status conference scheduled for April 5, 2018, and co-lead counsel were directed to file consolidated class action complaints on behalf of the two putative classes by March 15, Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. From July through October 2017, plaintiffs filed claims in Ontario, Quebec and British Columbia on behalf of putative classes of purchasers of German luxury vehicles against several automobile manufacturers, including Volkswagen Canada Inc., Audi Canada Inc., and other Group companies. The claims assert causes of action under the Competition Act, common law, and Quebec s civil law and contain similar allegations to the US complaints described in the paragraph above. Neither provisions nor contingent liabilities were stated because the early stage of proceedings makes an assessment currently impossible. In the tax proceedings between MAN Latin America and the Brazilian tax authorities, the Brazilian tax authorities took a different view of the tax implications of the acquisition structure chosen for MAN Latin America in In December 2017, a second instance judgment was rendered in administrative court proceedings, which was negative for MAN Latin America. MAN Latin America will initiate proceedings against this judgment before the regular court in Due to the difference in the penalties plus interest which could potentially apply under Brazilian law, the estimated size of the risk in the event that the tax authorities are able to prevail overall with their view is laden with uncertainty. However, a positive outcome continues to be expected for MAN Latin America. Should the opposite occur, this could result in a risk of about 0.7 billion for the contested period from 2009 onwards, which has been stated within the section entitled Contingent liabilities.

309 Consolidated Financial Statements Notes to the Consolidated Financial Statements 305 In line with IAS 37.92, no further statements have been made concerning estimates of financial impact or about uncertainty regarding the amount or maturity of provisions and contingent liabilities in relation to additional important legal cases. This is so as to not compromise the results of the proceedings or the interests of the Company. 38. Other financial obligations PAYABLE PAYABLE PAYABLE TOTAL million from 2022 Dec. 31, 2016 Purchase commitments in respect of property, plant and equipment 7,170 1,585 8,756 intangible assets 1, ,629 investment property Obligations from loan commitments to unconsolidated subsidiaries irrevocable credit and lease commitments to customers 4, ,595 long-term leasing and rental contracts 995 2,489 2,261 5,745 Miscellaneous other financial obligations 2,569 1,416 1,072 5,056 PAYABLE PAYABLE PAYABLE TOTAL million from 2023 Dec. 31, 2017 Purchase commitments in respect of property, plant and equipment 7,347 1,394 8,740 intangible assets ,425 investment property Obligations from loan commitments to unconsolidated subsidiaries irrevocable credit commitments to customers 3, ,695 long-term leasing and rental contracts 1,026 2,389 2,133 5,548 Miscellaneous other financial obligations 2,476 1, ,874

310 306 Notes to the Consolidated Financial Statements Consolidated Financial Statements Other financial obligations from long-term leasing and rental contracts are partly offset by expected income from subleases of 1,467 million (previous year: 1,664 million). To enhance comparability, irrevocable credit commitments to customers are reported without leasing commitments from fiscal year 2017 onward. As of December 31, 2016, the corresponding amount was 2.1 billion. Other financial obligations include an amount of 1.3 billion for investments in zero emissions vehicle infrastructure to which the Volkswagen Group had committed itself in the settlement agreements in the USA in connection with the diesel issue and in corresponding access and awareness initiatives for these technologies. 39. Total audit fees of the Group auditor Under the provisions of the Handelsgesetzbuch (HGB German Commercial Code), Volkswagen AG is obliged to disclose the total audit fee of the Group auditor, PricewaterhouseCoopers GmbH Wirtschaftsprüfungsgesellschaft. million ¹ Financial statement audit services Other assurance services 2 4 Tax advisory services 1 0 Other services Some services, which were previously reported as other assurance services, are now classified as audit services. Prior-year figures have been adjusted accordingly. The fee paid to the auditors in 2017 was mostly attributable to the audit of the consolidated financial statements of Volkswagen AG and of annual financial statements of German Group companies as well as to reviews of the interim consolidated financial statements of Volkswagen AG and of interim financial statements of German Group companies. The auditors provided assurance services and tax advice only to a small extent. Other services provided by the auditors in the reporting period focused on advice on how to implement new legal standards and on support for measures in connection with the diesel issue.

311 Consolidated Financial Statements Notes to the Consolidated Financial Statements Total expense for the period million Cost of materials Cost of raw materials, consumables and supplies, purchased merchandise and services 151, ,307 Personnel expenses Wages and salaries 31,432 29,971 Social security, post-employment and other employee benefit costs 7,518 7,046 38,950 37, Average number of employees during the year Performance-related wage-earners 253, ,204 Salaried staff 288, , , ,444 of which in the passive phase of partial retirement (7,156) (5,915) Vocational trainees 17,891 17, , ,406 Employees of Chinese joint ventures 74,558 72, , , Events after the balance sheet date There were no significant events after the end of fiscal year 2017.

312 308 Notes to the Consolidated Financial Statements Consolidated Financial Statements 43. Remuneration based on performance shares and phantom shares (share-based payment) At the beginning of 2017, the Supervisory Board of Volkswagen AG resolved to adjust the remuneration system of the Board of Management with effect from January 1, All members of the Board of Management voted in favor of switching to the new remuneration system in the course of fiscal year The new remuneration system of the Board of Management comprises non-performance-related and performance-related components. The performance-related remuneration consists of a performance-related annual bonus with a oneyear assessment period and a long-term incentive (LTI) in the form of a performance share plan with a forwardlooking three-year term (share-based payment). In addition, a bonus was converted into phantom preferred shares (phantom shares) in PERFORMANCE SHARES Each performance period of the performance share plan has a term of three years. At the time the LTI is granted, the annual target amount under the LTI is converted, on the basis of the initial reference price of Volkswagen s preferred shares, into performance shares of Volkswagen AG, which are allocated to the respective member of the Board of Management as a pure calculation position. After the end of the three-year term of the performance share plan, a cash settlement shall take place. The payment amount corresponds to the number of determined performance shares, multiplied by the closing reference price at the end of the three-year period plus a dividend equivalent for the relevant term. The payment amount under the performance share plan shall be limited to 200% of the target amount. If 100% of the targets agreed in each case are achieved, the target amount is 1.8 million for each member of the Board of Management and 3.8 million for the Chairman of the Board of Management. A total of 141,426 performance shares were allocated to the members of the Board of Management for The fair value of the obligation as of December 31, 2017 amounts to 43.8 million. The compensation cost of 43.8 million is recognized under personnel costs. If the members of the Board of Management had left the Company as of December 31, 2017, the obligation (intrinsic value) would have amounted to a total of 20.3 million. PHANTOM SHARES At its meeting on April 22, 2016, Volkswagen AG s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of phantom shares. The amount withheld led to the creation of 50,703 phantom preferred shares. The fair value of the obligation to the members of the Board of Management as of December 31, 2017 amounted to 7.0 million. The change in the fair value of 2.0 million was recognized under personnel costs. If all members of the Board of Management had left as of December 31, 2017, the obligation (intrinsic value) would have amounted to a total of 7.3 million. For further details on performance shares and phantom shares, please refer to our disclosures in the remuneration report, which is part of the Group management report. 44. Related party disclosures in accordance with IAS 24 Related parties as defined by IAS 24 are natural persons and entities that Volkswagen AG has the ability to control or on which it can exercise significant influence, or natural persons and entities that have the ability to control or exercise significant influence on Volkswagen AG, or that are influenced by another related party of Volkswagen AG. All transactions with related parties are conducted on an arm s length basis. At 52.2%, Porsche SE held the majority of the voting rights in Volkswagen AG as of the reporting date. The creation of rights of appointment for the State of Lower Saxony was resolved at the Extraordinary General Meeting of Volkswagen AG on December 3, As a result, Porsche SE cannot appoint the majority of the members of Volkswagen AG s Supervisory Board for as long as the State of Lower Saxony holds at least 15% of

313 Consolidated Financial Statements Notes to the Consolidated Financial Statements 309 Volkswagen AG s ordinary shares. However, Porsche SE has the power to participate in the operating policy decisions of the Volkswagen Group and is therefore classified as a related party as defined by IAS 24. The contribution of Porsche SE s holding company operating business to Volkswagen AG on August 1, 2012 has the following effects on the agreements between Porsche SE, Volkswagen AG and companies of the Porsche Holding Stuttgart Group that existed prior to the contribution and were entered into on the basis of the Comprehensive Agreement and its related implementation agreements: > Volkswagen AG continues to indemnify Porsche SE against certain financial guarantees issued by Porsche SE to creditors of the companies belonging to the Porsche Holding Stuttgart Group up to the amount of its share in the capital of Porsche Holding Stuttgart, which amounts to 100% since the contribution as of August 1, Porsche Holding Finance plc, Dublin, Ireland, was contributed to the Volkswagen Group in the course of the transfer of Porsche SE s holding company operating business. Until June 2017, the indemnification also included financial guarantees issued by Porsche SE to creditors of Porsche Holding Finance plc in relation to interest payments on, and the repayment of, bonds in the aggregate amount of 250 million. As part of the contribution of Porsche SE s holding company operating business to Volkswagen AG, Volkswagen AG undertook to assume standard market liability compensation effective August 1, 2012 for guarantees issued to external creditors, whereby it is indemnified internally. > Volkswagen AG continues to indemnify Porsche SE internally against claims by the Einlagensicherungsfonds (German deposit protection fund) after Porsche SE submitted an indemnification agreement required by the Bundesverband Deutscher Banken (Association of German Banks) to the Einlagensicherungsfonds in August Volkswagen AG has also undertaken to indemnify the Einlagensicherungsfonds against any losses caused by measures taken by the latter in favor of a bank in which Volkswagen AG holds a majority interest. > Under certain conditions, Porsche SE continues to indemnify Porsche Holding Stuttgart, Porsche AG and their legal predecessors against tax liabilities that exceed the obligations recognized in the financial statements of those companies relating to periods up to and including July 31, In return, Volkswagen AG has undertaken to pay to Porsche SE any tax benefits or tax refunds of Porsche Holding Stuttgart, Porsche AG and their legal predecessors and subsidiaries for tax assessment periods up to July 31, Based on the results of the external tax audit for the assessment periods 2006 to 2008 that has now been completed, a compensation obligation running into the low triple-digit millions of euros would arise for Volkswagen AG. New information emerging in the future from the external tax audit that commenced at the end of 2015 for the 2009 assessment period could result in an increase or decrease in the potential compensation obligation. Under the terms of the Comprehensive Agreement, Porsche SE and Volkswagen AG had granted each other put and call options with regard to the remaining 50.1% interest in Porsche Holding Stuttgart held by Porsche SE until the contribution of its holding company operating business to Volkswagen AG. Both Volkswagen AG (if it had exercised its call option) and Porsche SE (if it had exercised its put option) had undertaken to bear the tax burden resulting from the exercise of the options and any subsequent activities in relation to the equity investment in Porsche Holding Stuttgart (e.g. from recapture taxation on the spin-off in 2007 and/or 2009). If tax benefits had accrued to Volkswagen AG, Porsche Holding Stuttgart, Porsche AG, or their respective subsidiaries as a result of recapture taxation on the spin-off in 2007 and/or 2009, the purchase price to be paid by Volkswagen AG for the transfer of the outstanding 50.1% equity investment in Porsche Holding Stuttgart if the put option had been exercised by Porsche SE would have been increased by the present value of the tax benefit. This arrangement was taken over under the terms of the contribution agreement to the effect that Porsche SE has a claim against Volkswagen AG for payment in the amount of the present value of the realizable tax benefits from any recapture taxation of the spin-off in 2007 as a result of the contribution. It was also agreed under the terms of the contribution that Porsche SE will indemnify Volkswagen AG, Porsche Holding Stuttgart and their subsidiaries against taxes if measures taken by or not taken by Porsche SE result in recapture taxation for 2012 at these companies in the course of or following implementation of the contribution. In this case, too, Porsche SE is entitled to assert a claim for payment against Volkswagen AG in the amount of the present value of the realizable tax benefits that arise at the level of Volkswagen AG or one of its subsidiaries as a result of such a transaction.

314 310 Notes to the Consolidated Financial Statements Consolidated Financial Statements Further agreements were entered into and declarations were issued in connection with the contribution of Porsche SE s holding company operating business to Volkswagen AG, in particular: > Porsche SE indemnifies its contributed subsidiaries, Porsche Holding Stuttgart, Porsche AG and their subsidiaries against liabilities to Porsche SE that relate to the period up to and including December 31, 2011 and that exceed the obligations recognized in the financial statements of those companies for that period. > Porsche SE indemnifies Porsche Holding Stuttgart and Porsche AG against obligations arising from certain legal disputes; this includes the costs of an appropriate legal defense. > Moreover, Porsche SE indemnifies Volkswagen AG, Porsche Holding Stuttgart, Porsche AG and their subsidiaries against half of the taxes (other than taxes on income) arising at those companies in conjunction with the contribution that would not have been incurred in the event of the exercise of the call option on the shares of Porsche Holding Stuttgart that continued to be held by Porsche SE until the contribution. Volkswagen AG therefore indemnifies Porsche SE against half of such taxes that it incurs. In addition, Porsche Holding Stuttgart is indemnified against half of the land transfer tax and other costs triggered by the merger. > Additionally, Porsche SE and Porsche AG agreed to allocate any subsequent VAT receivables or liabilities from transactions in the period up to December 31, 2009 to the company entitled to the receivable or incurring the liability. > A range of information, conduct and cooperation obligations were agreed by Porsche SE and the Volkswagen Group. According to a notification dated January 2, 2018, the State of Lower Saxony and Hannoversche Beteiligungsgesellschaft Niedersachsen mbh, Hanover, held 20.00% of the voting rights of Volkswagen AG on December 31, As mentioned above, the General Meeting of Volkswagen AG on December 3, 2009 also resolved that the State of Lower Saxony may appoint two members of the Supervisory Board (right of appointment). The following tables present the amounts of supplies and services transacted, as well as outstanding receivables and liabilities, between consolidated companies of the Volkswagen Group and related parties. RELATED PARTIES SUPPLIES AND SERVICES RENDERED SUPPLIES AND SERVICES RECEIVED million Porsche SE and its majority interests Supervisory Board members Board of Management members Unconsolidated subsidiaries 1, , Joint ventures and their majority interests 14,294 13,728 1,225 1,377 Associates and their majority interests Pension plans Other related parties State of Lower Saxony, its majority interests and joint ventures

315 Consolidated Financial Statements Notes to the Consolidated Financial Statements 311 RECEIVABLES FROM LIABILITIES (INCLUDING OBLIGATIONS) TO million Dec. 31, 2017 Dec. 31, 2016 Dec. 31, 2017 Dec. 31, 2016 Porsche SE and its majority interests Supervisory Board members Board of Management members Unconsolidated subsidiaries 1,480 1,036 1,773 1,188 Joint ventures and their majority interests 9,889 8,808 2,168 1,784 Associates and their majority interests Pension plans Other related parties State of Lower Saxony, itsmajority interests and joint ventures The tables above do not contain the dividend payments of 3,653 million (previous year: 3,613 million) received from joint ventures and associates and dividends of 308 million (previous year: 17 million) paid to Porsche SE. Receivables from joint ventures are primarily attributable to loans granted in an amount of 6,277 million (previous year: 5,769 million) as well as trade receivables in an amount of 3,354 million (previous year: 2,855 million). Receivables from non-consolidated subsidiaries also result mainly from loans granted in an amount of 1,038 million (previous year: 479 million) and from trade receivables in an amount of 224 million (previous year: 196 million). Impairment losses of 56 million (previous year: 35 million) were recognized on the outstanding related party receivables. In fiscal year 2017, expenses of 36 million (previous year: 18 million) were incurred in this context. In addition, the Volkswagen Group has furnished guarantees to external banks on behalf of related parties in the amount of 220 million (previous year: 112 million). In the reporting period, the Volkswagen Group made capital contributions of 203 million (previous year: 391 million) to related parties. The changes in supplies and services received from and rendered to joint ventures and their majority interests are primarily attributable to deliveries to the Chinese joint ventures. The decrease in receivables from Porsche SE is attributable to a loan repayment. As in the previous year, obligations to members of the Supervisory Board relate primarily to interest-bearing bank balances of Supervisory Board members that were invested at standard market terms and conditions at Volkswagen Group companies. Obligations to the Board of Management comprise outstanding balances for the annual bonus and the fair values of the performance shares and phantom shares in the amount of 67.0 million (previous year: 26.1 million) granted to Board of Management members.

316 312 Notes to the Consolidated Financial Statements Consolidated Financial Statements In addition to the amounts shown above, the following expenses were recognized for the members of the Board of Management and Supervisory Board of the Volkswagen Group in the course of their activities as members of these bodies: Short-term benefits 33,967,996 45,456,678 Benefits based on performance shares and virtual shares 45,777, ,296 Post-employment benefits 10,872,088 9,347,409 Termination benefits 6,940,142 97,557,473 54,133,791 Benefits paid on the basis of performance shares include the cost of 43.8 million attributable to the performance shares granted to Board of Management members under the remuneration system applicable as from Pursuant to the guidance of IFRS 2, this requires inclusion of not only the performance share plan for 2017, but also of a pro-rated amount for future share plans to be granted during the current employment contract. Overall, benefits based on phantom shares resulted in income in 2016, because the income from reversing the provision for performance-based Board of Management remuneration ( 1.5 million) due to the waiver for fiscal year 2015 exceeded the cost attributable to the performance of the share price up to December 31, 2016 ( 0.8 million). In fiscal year 2017, the share price performance led to the recognition of expenses of 2.0 million for the phantom shares. The employee representatives and the representative of the senior executives on the Supervisory Board are also entitled to a regular salary as set out in their employment contracts. For members of German works councils, this is based on the provisions of the Betriebsverfassungsgesetz (BetrVG German Works Constitution Act). Investigations by the authorities are currently under way to determine whether the remuneration of some works council members can be justified. As a precaution, components of the remuneration of some works council members has been retained in this context until the matter is clarified. The post-employment benefits relate to additions to pension provisions for current members of the Board of Management. The termination benefits relate to the severance payment made to Ms. Hohmann-Dennhardt in connection with her early departure from the Board of Management. Disclosures on the pension provisions for members of the Board of Management and more detailed explanations of the remuneration of the Board of Management and the Supervisory Board can be found in the section entitled Remuneration of the Board of Management and the Supervisory Board and in the remuneration report, which is part of the management report. 45. German Corporate Governance Code On November 17, 2017, the Board of Management and Supervisory Board of Volkswagen AG issued their declaration of conformity with the German Corporate Governance Code as required by section 161 of the Aktiengesetz (AktG German Stock Corporation Act) and made it permanently available to the shareholders of Volkswagen AG on the Company s website at On November 30, 2017, the Board of Management and Supervisory Board of AUDI AG likewise issued their declaration of conformity with the German Corporate Governance Code and made it permanently available to the shareholders at In December 2017, the Executive Board and Supervisory Board of MAN SE issued their declaration of conformity with the German Corporate Governance Code as required by section 161 of the AktG and made it permanently available to the shareholders at The Executive and Supervisory Boards of RENK AG issued a declaration of conformity on December 5, 2017 and made it permanently available to the shareholders at

317 Consolidated Financial Statements Notes to the Consolidated Financial Statements Remuneration of the Board of Management and the Supervisory Board Board of Management remuneration Non-performance-related remuneration 14,337,116 18,093,835 Performance-related remuneration 15,844,041 21,453,778 Long-term incentive component 20,104,770 50,285,927 39,547,612 Supervisory Board remuneration Non-performance-related remuneration 3,516, ,346 Performance-related remuneration 270,450 4,687,220 3,786,839 5,396,565 NON-PERFORMANCE-RELATED REMUNERATION OF THE BOARD OF MANAGEMENT The non-performance-related remuneration of the Board of Management comprises fixed remuneration and fringe benefits. In addition to the basic level of remuneration, the fixed remuneration also includes differing levels of remuneration for appointments assumed at Group companies. The prior-year figure also includes an amount of 6.3 million to compensate Ms. Hohmann-Dennhardt for lost entitlements resulting from the change in employer. The fringe benefits result from the grant of noncash benefits and include in particular the use of operating assets such as company cars and the payment of insurance premiums. Taxes due on these noncash benefits were mainly borne by Volkswagen AG. PERFORMANCE-RELATED REMUNERATION AND LONG-TERM INCENTIVE COMPONENT OF THE BOARD OF MANAGEMENT Performance-related remuneration includes the annual bonus with a one-year assessment period. The longterm incentive component contains the long-term incentive (LTI) in the form of a performance share plan with a forward-looking three-year term. The performance shares granted to the incumbent members of the Board of Management under the new remuneration system in 2017 were recognized at their fair value of 20.1 million at the grant date; this amount represents remuneration under German GAAP. At its meeting on April 22, 2016, Volkswagen AG s Supervisory Board accepted the offer made by the members of the Board of Management to withhold 30% of the variable remuneration for fiscal year 2015 for the Board of Management members active on the date of the resolution and to make its disposal subject to future share price performance by means of phantom shares. The resulting effects on remuneration were reported as appropriate in previous years. In fiscal year 2017, expenses of 43.8 million were recognized for the performance shares and of 2.0 million for the phantom shares. If these expenses exceed the fair value of the performance shares at the grant date, they do not represent remuneration under German GAAP and are therefore not included in the tables above. As in the previous year, no interest-free advances were paid to members of the Board of Management.

318 314 Notes to the Consolidated Financial Statements Consolidated Financial Statements SUPERVISORY BOARD REMUNERATION As a result of its regular review of the Supervisory Board remuneration, the Supervisory Board proposed a reorganization of the system of Supervisory Board remuneration to the 2017 Annual General Meeting, which was approved on May 10, 2017 with % of the votes cast. The remuneration of the members of the Supervisory Board of Volkswagen AG no longer contains any performance-related remuneration components but consists entirely of non-performance-related remuneration components. Remuneration for supervisory board work at subsidiaries continues to comprise a mix of non-performance-related and performance-related components. The remuneration disclosed for members of the Supervisory Board for 2016 shows the amounts determined on the basis of the old system of Supervisory Board remuneration. The members of the Supervisory Board declared to the Management Board that they would waive the portion of their remuneration for fiscal year 2016 that exceeds the amount that would have resulted for fiscal year 2016 from implementing the system of Supervisory Board remuneration resolved by the Annual General Meeting on May 10, 2017 with retroactive effect to January 1, The total amount waived for 2016 by all members of the Supervisory Board is 1.2 million. Mr. Pötsch additionally waived an amount of 0.1 million of his variable remuneration for fiscal year 2016 and waived his remuneration for fiscal year 2017 in full. The reason for this waiver is the agreement made in connection with Mr. Pötsch s transfer from the Management Board to the Supervisory Board as of October 8, 2015, which specified that the amount of Supervisory Board remuneration received up to December 31, 2017 would be deducted from the compensation payment to which he would have been entitled for the period from October 8, 2015 to December 31, PENSION ENTITLEMENTS On December 31, 2017, the pension provisions for members of the Board of Management in accordance with IFRSs amounted to million (previous year: million). Current pensions are index-linked in accordance with the index-linking of the highest collectively agreed salary insofar as the application of section 16 of the Gesetz zur Verbesserung der betrieblichen Altersversorgung (BetrAVG German Company Pension Act) does not lead to a larger increase. Former members of the Board of Management and their surviving dependents received 19.9 million (previous year: 11.1 million). This includes the amounts promised to Ms. Hohmann-Dennhardt in connection with her departure from the Board of Management. Ms. Hohmann-Dennhardt received non-performancerelated remuneration of 2.1 million and performance-related remuneration of 4.9 million for the period from February 1, 2017 to December 31, Pension provisions in accordance with IFRSs for this group of individuals amounted to million (previous year: million). The individual remuneration of the members of the Board of Management and the Supervisory Board is explained in the remuneration report in the management report on page 67. A comprehensive assessment of the individual bonus components and of the LTI in the form of the performance share plan can also be found there.

319 Consolidated Financial Statements Responsibility Statement 315 Responsibility Statement To the best of our knowledge, and in accordance with the applicable reporting principles, the consolidated financial statements give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group, and the Group management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the material opportunities and risks associated with the expected development of the Group. Wolfsburg, February 23, 2018 Volkswagen Aktiengesellschaft The Board of Management Matthias Müller Karlheinz Blessing Herbert Diess Francisco Javier Garcia Sanz Jochem Heizmann Andreas Renschler Rupert Stadler Hiltrud Dorothea Werner Frank Witter